COMMISSION IMPLEMENTING REGULATION (EU) 2020/1336

of 25 September 2020

imposing definitive anti-dumping duties on imports of certain polyvinyl alcohols originating in the People’s Republic of China

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Regulation (EU) 2016/1036 of the European Parliament and of the Council of 8 June 2016 on protection against dumped imports from countries not members of the European Union (1) (‘the basic Regulation’), and in particular Article 9(4) thereof,

After consulting the Member States,

Whereas:

1. PROCEDURE

1.1. Initiation

(1) On 30 July 2019, the European Commission (‘the Commission’) initiated an anti-dumping investigation with regard to imports into the Union of certain polyvinyl alcohols (‘PVA’) originating in the People’s Republic of China (‘PRC’ or ‘the country concerned’) on the basis of Article 5 of Regulation (EU) 2016/1036. It published a Notice of Initiation in the Official Journal of the European Union (2) (‘the Notice of Initiation’).

(2) The Commission initiated the investigation following a complaint lodged on 19 June 2019 by Kuraray Europe GmbH (‘the complainant’) on behalf of producers representing more than 60 % of the total Union production of PVA. The complaint contained evidence of dumping and of resulting material injury that was sufficient to justify the initiation of the investigation.

1.2. Interested parties

(3) In the Notice of Initiation, the Commission invited interested parties to contact it in order to participate in the investigation. In addition, the Commission specifically informed the complainant, other known Union producers, the known exporting producers and the authorities of the PRC, the known importers and users about the initiation of the investigation and invited them to participate.

(4) Interested parties had an opportunity to comment on the initiation of the investigation and to request a hearing with the Commission and/or the Hearing Officer in trade proceedings. All interested parties who so requested were granted a hearing.

1.3. Comments on initiation

(5) After the initiation, several users of the product concerned argued that the non-confidential summary of the information provided in the open version of the complaint was not sufficiently detailed or was incomplete, thus did not allow for a reasonable understanding of the substance of the confidential information.

(6) The Commission considered that the non-confidential version of the complaint open for inspection by interested parties contained all the essential evidence and non-confidential summaries of data provided under confidential cover in order for interested parties to exercise their rights of defence throughout the proceedings.

(7) Article 19 of the basic Regulation and Article 6(5) of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade allow for the safeguarding of confidential information in circumstances where its disclosure would be of significant competitive advantage to a competitor or would have a significantly adverse effect upon a person supplying the information or upon a person from whom that person has acquired the information.

(8) The information provided confidential treatment falls under these categories. In any event, the complainant provided summaries of the contents of the confidential segments of the complaint and the relevant bracketing of numerical data. The Commission verified these documents before initiation. It concluded that they satisfied the provisions of Article 19 and allowed for a reasonable understanding of the substance of the confidential information.

(9) The claim was therefore dismissed.

(10) One interested party claimed that the complaint is part of a strategy of the complainant to enhance its monopoly on the Union market, by deliberately reducing sales volume and increasing prices.

(11) The information collected during the investigation showed no evidence of any anti-competitive practices carried out by the Union industry. On the contrary specific evidence, such as commercial offers and email exchanges, that the industry is capable and willing to supply any user of the product concerned was collected.

(12) The complainant itself had [25 % – 30 %] market share of the Union free market during the investigation period, far below the share to allow it to exercise dominance of any kind.

(13) Concerning the alleged strategy to reduce volumes and increase prices, the investigation showed that the complainant initially attempted to improve its economies of scale, increasing production output and investments in order to reduce its unit costs of production. Moreover it tried to follow Chinese dumped prices with price suppression of its own in order to maintain market share. This strategy did indeed allow the complainant to maintain market share but pushed it into significant losses. As explained below in recital (528), the complainant was thus forced to abandon its attempts to maintain market share against imports from the PRC, and consequently concentrated its sales on more expensive grades where profitable sales could still be achieved albeit with a corresponding significant loss of market share.

(14) Therefore this claim was rejected.

(15) After the initiation, a Union producer, Wacker Chemie AG, claimed that the estimation of the Chinese overcapacity in the complaint was inaccurate and presented its own estimation.

(16) The estimation of the Chinese overcapacity in the complaint was based on an objective and established source, IHS Chemical Economics handbook. Whilst different estimations of the supply and demand on the Chinese market may justifiably exist, the Commission considered that the estimation in the complaint met the criteria of sufficient accuracy and reliability required for prima facie evidence. Therefore, this claim was rejected.

(17) Wacker Chemie AG also submitted comments as regards the methodology for calculating the dumping margins pursuant to Article 2(6a) of the basic Regulation, notably arguing that the application of Article 2(6a) of the basic Regulation would be WTO-inconsistent and that there was absence of evidence of cost distortion. The issues related to the existence of significant distortions and application of the Article 2(6a) of the basic Regulation are discussed in the section 3.1.1 below.

(18) After the initiation, Wacker Chemie AG also claimed that the complainant’s estimation of the dumping margin and the normal value was incorrect because Chinese producers were vertically integrated and did not buy vinyl acetate monomer (VAM) for their production.

(19) The complaint indicated distortions for a number of raw materials that can be used for production of the VAM, depending on the production method. These same raw materials are also used in case the producers are vertically integrated and do not purchase VAM from other companies, and therefore, the distortions of these raw materials were relevant for the calculation of the normal value. It should also be noted that the normal value calculation in the complaint is sufficient evidence of dumping and that the investigation established the normal value based on the verified data of the cooperating Chinese exporting producers. Therefore this claim was dismissed.

(20) At initiation Wacker and Carbochem claimed that the Commission used a PCN system that did not properly ensure price comparability. The argument was reiterated after disclosure by Wacker, Carbochem, Gamma Chimica, FAR Polymer and Ahlstrom-Munksjö.

(21) Wacker claimed that the PCN had too wide ranges of viscosity, hydrolysis and methanol contents and did not take into account the particle size and the pH value. Carbochem, Gamma Chimica and FAR Polymer argued that the molecular weight was not taken into account by the PCN, while Ahlstrom-Munksjö argued that the ash content range was too wide.

(22) The Commission disagreed that there is an issue with the PCN structure. The PCNs contained the basic and essential properties of the product concerned, universally defined by the core elements therein included in the PCN (i.e. viscosity, hydrolysis, ash and methanol content). These parameters are essential for all PVA grades and considered industrial standards for all applications of the product concerned. Thus, while it may be true that certain characteristics not present in the PCN could be relevant for certain applications, these are user (and not product) specific.

(23) The argument was therefore rejected.

1.4. Sampling

(24) In its Notice of Initiation, the Commission stated that it might sample the interested parties in accordance with Article 17 of the basic Regulation.

1.4.1. Sampling of Union producers

(25) In its Notice of Initiation, the Commission stated that it had provisionally selected a sample of Union producers. The Commission selected the sample on the basis of the reported production volume of the like product in the Union. This sample consisted of 3 Union producers. The sampled Union producers accounted for more than 90 % of the estimated total EU production of the like product. The Commission invited interested parties to comment on the provisional sample.

(26) One party expressed reservations about the inclusion in the sample of a producer, Wacker Chemie AG, which manufactures the product concerned exclusively for its captive use. In its opinion, the inclusion of Wacker in the sample, with no sales in the free market, could have potentially distorted the injury analysis.

(27) The Commission also took note of the situation of one of the sampled companies. However, it must be noted that the entire Union industry, including the three Union producers initially sampled, produce the product concerned for captive consumption as well. Therefore, it was considered that the inclusion of Wacker Chemie AG in the sample did not distort the injury analysis, and allowed the Commission to analyse thoroughly the situation also of the captive market of PVA in the Union. Therefore, the sample was considered representative of the Union industry.

(28) In order to have a complete assessment of the facts of the case, the Commission considered the interest of the Union producers Wacker and Solutia also as users of the product under investigation.

(29) Later in the proceeding, one of the three sampled producers, Sekisui Specialty Chemicals Europe S.L., informed the Commission that it could not cooperate in full as a sampled producer. In fact, its reply to the questionnaire only included information with respect to macro-indicators, which was insufficient for the purposes of the investigation. Hence, the Commission decided to revise the sample of Union producers by removing Sekisui Specialty Chemicals Europe S.L.

(30) The amended sample, composed of two union producers, represents more than 80 % of the estimated total EU production of the like product. The sample is representative of the Union industry.

1.4.2. Sampling of importers

(31) To decide whether sampling was necessary and, if so, to select a sample, the Commission asked unrelated importers to provide the information specified in the Notice of Initiation.

(32) Six unrelated importers provided the requested information and agreed to be included in the sample. In accordance with Article 17(1) of the basic Regulation, the Commission selected a sample of three unrelated importers on the basis of the largest volume of imports into the Union. In accordance with Article 17(2) of the basic Regulation, all known importers concerned were consulted on the selection of the sample. No comments were made.

1.4.3. Sampling of exporting producers in the PRC

(33) To decide whether sampling was necessary and, if so, to select a sample, the Commission asked all exporting producers in the PRC to provide the information specified in the Notice of Initiation. In addition, the Commission asked the Mission of the People’s Republic of China to the European Union to identify and/or contact other exporting producers, if any, that could be interested in participating in the investigation.

(34) Four exporting producers in the country concerned provided the requested information and agreed to be included in the sample. In accordance with Article 17(1) of the basic Regulation, the Commission selected a sample of three, on the basis of the largest representative volume of exports to the Union which could reasonably be investigated within the time available. In accordance with Article 17(2) of the basic Regulation, all interested parties, and the authorities of the country concerned, were consulted on the selection of the sample. No comments were received.

1.5. Individual examination

(35) Originally, all four groups of exporting producers that returned the sampling form requested individual examination under Article 17(3) of the basic Regulation. On the day of the initiation, the Commission made the questionnaire for exporting producers available on its website. Moreover, when announcing the sample, the Commission informed the exporting producer that was not sampled that it was required to provide a full questionnaire reply if it wished to be examined individually. The exporting producer did not provide a questionnaire reply. In the absence of a reply, the exporting producer did not comply with the requirements and, therefore, individual examination could not be granted.

1.6. Questionnaire replies and verification visits

(36) The Commission sent a questionnaire concerning the existence of significant distortions in the PRC within the meaning of Article 2(6a)(b) of the basic Regulation to the Government of the People’s Republic of China (‘GOC’). The questionnaires for the Union producers, importers, users, and exporting producers were made available online on the day of initiation.

(37) Questionnaire replies were received from the two sampled Union producers and the three sampled exporting producers. As mentioned in recital (29) above, an incomplete questionnaire reply was received also by another Union producer, which was for this reason excluded from the sample. Nine users and three unrelated importers provided the Commission with a questionnaire reply. No reply was received from the GOC.

(38) The Commission sought and verified all the information deemed necessary for a determination of dumping, resulting injury and Union interest. Verification visits pursuant to Article 16 of the basic Regulation were carried out at the premises of the following companies: Union producers: — Kuraray Europe GmbH, Germany (‘KEG’); — Wacker Chemie AG, Germany (‘Wacker’); Unrelated Importers: — Carbochem Srl, Italy (‘Carbochem’); — Omya Hamburg GmbH, Germany (‘Omya’); — Wegochem Europe B.V., Netherlands (‘Wegochem’); Users: — Cordial B.V., Netherlands (‘Cordial’); — Solutia Europe SPRL/BVBA, Belgium (‘Solutia’); — Wacker Chemie AG, Germany (‘Wacker’); Exporting producers and their related companies in the People’s Republic of China: Shuangxin: — Inner Mongolia Environment-Friendly Material Co., Ltd (‘Shuangxin’); Sinopec Group: — Central-China Company, Sinopec Chemical Commercial Holding Co., Ltd (‘Sinopec Central China’); — Sinopec Chongqing SVW Chemical Co., Ltd (‘Sinopec Chongqing’); — Sinopec Great Wall Energy & Chemical (Ningxia) Co., Ltd (‘Sinopec Ningxia’); — Sinopec Shanghai Petrochemical Co., Ltd; Wan Wei Group:: — Anhui Wan Wei Updated High-Tech Material Industry Co., Ltd (‘Wan Wei’); — Inner Mongolia Mengwei Technology Co., Ltd (‘Mengwei’).

1.7. Investigation period and period considered

(39) The investigation of dumping and injury covered the period from 1 July 2018 to 30 June 2019 (‘the investigation period’ or ‘IP’). The examination of trends relevant for the assessment of injury covered the period from 1 January 2016 to the end of the investigation period (‘the period considered’).

1.8. Procedure for the determination of the normal value under Article 2(6a) of the basic Regulation

(40) In view of the sufficient evidence available at the initiation of the investigation pointing to the existence of significant distortions within the meaning of point (b) of Article 2(6a) of the basic Regulation, the Commission considered it appropriate to initiate the investigation having regard to Article 2(6a) of the basic Regulation.

(41) Consequently, in order to collect the necessary data for the eventual application of Article 2(6a) of the basic Regulation, in the Notice of Initiation, the Commission invited all exporting producers in the country concerned to provide the information requested in Annex III to the Notice of the Initiation regarding the inputs used for producing PVA. Four exporting producers submitted the relevant information.

(42) In order to obtain information it deemed necessary for its investigation with regard to the alleged significant distortions within the meaning of point (b) of Article 2(6a) of the basic Regulation, the Commission also sent a questionnaire to the GOC. No reply was received from the GOC. Subsequently, the Commission informed the GOC that it would use facts available within the meaning of Article 18 of the basic Regulation for the determination of the existence of the significant distortions in the PRC.

(43) In the Notice of Initiation, the Commission also invited all interested parties to make their views known, submit information and provide supporting evidence regarding the appropriateness of the application of Article 2(6a) of the basic Regulation within 37 days of the date of publication of this Notice in the Official Journal of the European Union.

(44) After the initiation, three Chinese exporting producers submitted comments as regards the methodology for calculating the dumping margins pursuant to Article 2(6a) of the basic Regulation, notably arguing that the Commission has not proved that the alleged governmental intervention has demonstrably led to the price distortions of inputs. The issues related to the existence of significant distortions are discussed in the section 3.1.1 below.

(45) In the Notice of Initiation, the Commission also specified that, in view of the evidence available, it may need to select an appropriate representative country pursuant to Article 2(6a)(a) of the basic Regulation for the purpose of determining the normal value based on undistorted prices or benchmarks.

(46) On 2 October 2019, the Commission published a first note for the file (‘the Note of 2 October 2019’) (3) seeking the views of the interested parties on the relevant sources that the Commission may use for the determination of the normal value, in accordance with Article 2(6a)(e) second ident of the basic Regulation. In that note, the Commission provided a list of all factors of production such as materials, energy and labour used in the production of the product concerned by the exporting producers. In addition, based on the criteria guiding the choice of undistorted prices or benchmarks, the Commission identified possible representative countries (namely Brazil, Malaysia, Mexico and Thailand).

(47) The Commission gave all interested parties the opportunity to comment. The Commission received comments from three exporting producers, one importer and user and the complainant. The GOC did not provide any comments.

(48) The Commission addressed the comments received on the Note of 2 October 2019 in the second note on the sources for the determination of the normal value of 20 December 2019 (‘the Note of 20 December 2019’) (4). The Commission also provided the revised list of factors of production. Based on the comments received the Commission added also Turkey to the list of possible representative countries and, after further research, concluded that, at that stage, Turkey was considered an appropriate representative country under Article 2(6a)(a), first indent of the basic Regulation. The Commission also determined the list of codes used by Turkey and made available the relevant Turkish customs statistics in the open file.

(49) The Commission invited interested parties to comment. The Commission received comments from one exporting producer, three traders of the product under investigation in the Union and the complainant.

(50) The Commission addressed the comments received following the Note of 20 December 2019 in the third note on the sources for the determination of normal value of 30 March 2020 (‘the Note of 30 March 2020’) (5). In that note the Commission also further clarified some of the sources for the determination of the normal value and invited the interested parties to comment. Following the Note of 30 March 2020, the Commission received comments only from three traders of the product under investigation in the Union. This Regulation addresses those comments in recitals (219), (220), (264), (342) and (343).

1.9. Non-imposition of provisional measures and subsequent procedure

(51) On 9 March 2020, in accordance with Article 19a(2) of the basic Regulation, the Commission informed the interested parties of its intention not to impose provisional measures and to continue the investigation.

(52) Since no provisional measures were imposed, no registration of imports was performed.

2. PRODUCT CONCERNED AND LIKE PRODUCT

2.1. Product concerned

(53) The product concerned (6) is certain polyvinyl alcohol (PVA), whether or not containing un-hydrolysed acetate groups, in the form of homopolymer resins with a viscosity (measured in 4 % aqueous solution at 20 °C) of 3 mPa·s or more but not more than 61 mPa·s and a degree of hydrolysis of 80,0 mol % or more but not more than 99,9 mol %, both measured according to the ISO 15023-2 method, originating in the People’s Republic of China (PRC) (‘the product concerned’).

(54) During the investigation it became apparent that the product description, in particular regarding the measurement method of viscosity and degree of hydrolysis, was not sufficiently precise and could lead to misinterpretation and/or misclassification by national customs authorities. Furthermore, there was a risk that economic operators had misinterpreted that description and, on that basis, may have decided not to come forward as interested parties. For that reason, the Commission clarified the wording of the product scope description included in the Notice of initiation by publishing a Notice on 7 November 2019 (‘Clarification Notice’) (7). The Clarification Notice also gave the possibility for parties to come forward within a prescribed time limit to make themselves known and to request a questionnaire, if they wished so. One user of the product concerned, Henkel AG & Co., came forward asking to be regarded as interested party in the proceeding. No interested parties requested a questionnaire.

(55) PVA is used as an additive, precursor or agent by, mainly, four user industries in: (i) the production of paper and carton board; (ii) the production of PVB (Polyvinyl Butyral) resins used in the production of PVB-films; (iii) the production of polymerisation aids for plastics; and (iv) the production of emulsions and adhesives.

2.2. Like product

(56) The investigation showed that the following products have the same basic physical, chemical and technical characteristics as well as the same basic uses: — the product concerned; — the product produced and sold on the domestic market of the country concerned; — the product produced and sold in the Union by the Union industry.

(57) The Commission found that those products are therefore like products within the meaning of Article 1(4) of the basic Regulation.

2.3. Segmentation

(58) The product concerned is produced and sold in the form of several different product types defined by the industry as ‘grades’. Each grade consists of a specific combination of viscosity levels, methanol and ash content, as well as degree of hydrolysis, resulting in a wide range of combinations manufactured to meet the demands of customer specifications in different industries.

(59) The investigation revealed a large number of PVA grades both for Chinese imports and Union production/sales. The different characteristic combinations of these grades were categorised by the Commission within different product control numbers (‘PCN’). During the investigation period 34 PCNs of the product concerned were imported into the Union by the sampled exporting producers, while the sampled Union producer sold around 39 different PCNs in the same period.

(60) The information collected during the investigation also showed that some of these grades (sold both by the Union industry and exporting producers) have a broad range of application and, generally, have a lower price. Other more specialised grades designed for applications with narrow specifications (such as pharmaceutical products or the PVB-film production) are on average more expensive. These grades are also sold by Union and exporting producers.

(61) However, despite a large number of grades, the Commission found that there is no defined segments in the PVA market. Different users can source a number of PVA grades, depending on their required technical specifications. For some users the ash content is the most important element, for others the viscosity, and some are able to use mostly any of the specification. Each user industry can use a different set of PVA grades interchangeably. Even though certain users (such as PVB, pharmaceutical industry) are more limited in terms of the number of grades they can use, their grade range still overlaps with other type of users, which are able to source a wider range of grades.

(62) For the reasons above, the Commission concluded that all grades compete with each other, at least to a certain extent, and therefore a segment analysis was not warranted nor appropriate in this case. In order to analyse the price effect among different grades while ensuring a fair comparison, the Commission conducted adjustments to reflect differences in some of the characteristics of the different grades. These adjustments are explained in Section 4.4.2 below.

(63) After disclosure several interested parties, Carbochem, Gamma Chimica FAR Polymer, Wacker and Cordial, claimed that the Commission failed to take into account that the PVA market is divided in two segments: high quality PVA and low quality PVA. The parties claimed that the products pertaining to these segments are not directly interchangeable and that Chinese imports are mostly present in the low quality PVA segment. In addition they claimed that certain users can only use certain specific grades of the product concerned in their production process.

(64) The analysis carried out by the Commission confirmed that the different grades, as explained in recital (61), are interchangeable between each other, at least to a certain extent. Even if it is true that certain users can source only a limited set of grades for their application, these grades do not pertain exclusively to one user’s downstream industry but overlap with the grades sourced by other downstream applications. Moreover, the investigation revealed that the Chinese exporting producers supply grades for all the four main applications of PVA and compete in full with the grades sold by the Union industry.

(65) The claim was therefore dismissed.

2.4. Claims regarding product scope

(66) One user, Solutia, producer of PVB-film, and one unrelated importer, Wegochem, claimed that ‘Low-Ash NMWD PVA’ (8) should be excluded from the scope of the product concerned. The parties reiterated their claim after disclosure.

(67) According to them ‘Low-Ash NMWD PVA’ is fundamentally different from standard grade PVA as it has different physical, technical and chemical characteristics and requires a high-value added production process. Due to these specific characteristics, production of Low-Ash NMWD is technically difficult and complex. Only a few manufacturers are qualified to manufacture this particular grade, used in the production of PVB film, and only one of them is active in the PRC. In particular, the molecular weight distribution, the iron content, the low ash and low methanol contents are not standard characteristics of the product concerned and makes this grade of PVA unique and extremely difficult to produce, as its characteristics have to be within a narrow specification for all the parameters simultaneously.

(68) Based on the evidence on file, the Commission disagreed with this analysis. As mentioned in recital (58), PVA is sold in several different grades, according to the final use. Each grade has a unique combination of properties (e.g. viscosity, hydrolysis, ash and methanol content) that are specifically requested by each user to the producer at the time of the purchase order. With regards to the different chemical and physical characteristics, contrary to the arguments of the parties, low ash content PVA products fall fully within the product definition as regards its essential characteristics (i.e. viscosity, hydrolysis methanol and ash content). Moreover all the producers of low ash content PVA produce it on a standard production line, without exceptional production processes being applied.

(69) As regards the narrow molecular weight distribution (‘NMWD’), this is not a characteristic akin to hydrolysis, viscosity or ash content. NMWD does not change from production batch to production batch. Once a production line is qualified to produce NMWD PVA all the PVA produced by that line will meet the requirements as it does not involve any additional steps in the production process and it does not have any peculiar characteristics radically different from any other grades. In addition, it is not exclusively used to produce PVB resin but also used for the production of adhesives and water-soluble barrier coatings.

(70) Finally, the investigation revealed that, in terms of supply, several PVA producers can produce low ash NMWD PVA. In addition to the Chinese origin low ash NMWD PVA, comparable low ash content PVA, can be sourced from producers located in the United States of America (‘USA’) and from the Union producers.

(71) After disclosure, the parties argued that the Commission failed to take into account that all the relevant characteristics of ‘Low-Ash NMWD PVA’ must be met simultaneously and that there are few producers qualified to supply low ash NMWD PVA.

(72) Contrary to the parties’ claim, the Commission in fact took into consideration that all the parameters for ‘Low-Ash NMWD PVA’ must be met simultaneously. Both the methanol and the ash contents fall fully within the product definition as regards its essential characteristics, as well as within the Commission’s categorisation based on PCNs. The investigation also showed that both the Union producers and exporting producers are able to meet the required specifications. As regards the narrow molecular weight distribution in combination with the other two parameters, as explained above in recital (69), once a production line is qualified to produce NMWD PVA, all the PVA produced by that line will meet the requirements for narrow molecular weight distribution, and can then be combined with the appropriate methanol and ash content according to each customer’s requirement. Hence it’s not a characteristic pertaining exclusively to PVA produced for Solutia.

(73) As regards the second point, Solutia had a multi-sourcing strategy, producing PVA for its own consumption, as well as extensively using multiple sources of supply of PVA from the Union industry, the exporting producers in the PRC and the producers in third countries. The Commission found that there are at least four producers in three different continents that are able to produce ‘Low-Ash NMWD PVA’. Thus, while it is true that the qualification of a new PVA supplier could be a difficult and long process, the investigation showed that there are several alternative sources that would limit significantly the risk of a shortage of supply for Solutia even with the measures in force. Moreover, in the Commission’s view, the level of the anti-dumping duties would not prevent Solutia’s supplier from the PRC to continue to export PVA at a fair price.

(74) The claim was therefore rejected.

(75) Three other interested parties, namely Cordial, Carbochem and Wacker, claimed repeatedly, and reiterated their claims after disclosure, that the product concerned imported from the PRC differed substantially from the like product produced by the Union industry. Their main argument was that the PVA imported from the PRC had a significantly broader range of tolerance in terms of ash content, sodium-acetate percentage and methanol content as compared to the PVA produced and sold by the Union industry. While in the production of PVB resins and certain emulsions these characteristics had a significant impact, for other applications such as paper, adhesives and textile additives they were not relevant. Therefore, in their opinion, the product concerned and the like product were substantially different and suitable for different applications, and the Union market was divided into high-quality and low-quality PVA.

(76) The investigation revealed that for almost all applications, the customers set the maximum acceptable limit of ash content, and can easily accept PVA with much lower ash content than their top thresholds. In addition, the difference between the costs of production of the alleged ‘standard’ PVA (i.e. ash content above 0,5 %) versus ‘low ash content’ PVA (ash content below 0,5 %) was negligible, as the production process for PVA in terms of the ash content is always the same. However, it is true that the ash content is less relevant for applications such as paper or adhesives. The investigation also found that, except for one user, all user industries were purchasing PVA with both low and high ash content.

(77) Concerning the methanol content, the Union industry produces PVA with a significantly lower methanol content than the Chinese producers. However, both the product concerned and the like product are perfectly in range with the different methanol thresholds established during the investigation. Moreover, also for methanol, differences are a matter of maximum acceptable levels and not of narrow specification. In addition, the investigation revealed that the methanol content, both in the PRC and in the Union, has a negligible effect on both the selling price and the cost of manufacturing of PVA.

(78) Moreover, as explained above in recitals (58) to (62), the various grades of PVA share the basic characteristics and their uses are to a large extent identical and interchangeable. The sole ash or methanol content levels do not define, alone, the applications or the price of the product concerned as it is the combination with the other relevant characteristics, such as viscosity and hydrolysis, which defines the grade characteristics, its possible end use and the selling price.

(79) The evidence collected in the investigation revealed that, while the average price difference between the PVA grades with ‘low ash content’ versus those with ‘standard ash content’ is about 10 %. However, PVA prices can vary up to 40 % between PVA grades with the same ash content. In addition, certain allegedly cheaper grades with a ‘standard’ ash content can be up to 27 % more expensive than those with ‘low ash content’ grades. Therefore it cannot be concluded, as the interested parties claimed, that the Union market was divided into high-quality PVA (produced by the Union industry) and low-quality PVA (imported from the PRC) based on the ash and methanol content, neither that this alleged division is reflected in the prices and the production cost. On the contrary, as explained above in recitals (58) to (62), several grades with alleged ‘standard’ specifications are also in competition with alleged ‘high-end’ grades of the like product.

(80) After disclosure, Wacker argued that the Commission assessment that methanol content has a negligible effect on the selling price and the cost of manufacturing of PVA was incorrect.

(81) The investigation showed that PVA with a very low methanol content has a higher production cost than PVA with the same characteristics but with higher methanol content. However, as explained above in recital (77), the data collected during the investigation also showed that for both the Union producers and the exporting producers the different methanol levels had a negligible impact on the selling prices. Therefore, the Commission found that the methanol content has a negligible effect on the selling price of PVA. It is true that the Union industry can produce PVA with a very low methanol content. However this is a niche product, sold in negligible quantities, while the largest part of the PVA sold in the Union market has standard methanol content.

(82) The claim was therefore rejected

(83) Another party, Cordial, claimed that the PVA produced in the Union is not suitable for its use as it required PVA in powder form and with a hydrolysis level above 89 %.

(84) PVA is usually produced in a white solid granular form. However it can be further processed and transformed in powder form through a grinding process. As the investigation revealed, the Union industry is perfectly capable to carry out this further step.

(85) Concerning the hydrolysis level, the data collected in the proceeding showed that the Union industry produced, and sold PVA with a hydrolysis level above 89 % during the IP. The claim was therefore rejected.

3. DUMPING

3.1. Normal value

(86) According to Article 2(1) of the basic Regulation, ‘the normal value shall normally be based on the prices paid or payable, in the ordinary course of trade, by independent customers in the exporting country’.

(87) According to Article 2(6a)(a) of the basic Regulation, ‘(i)n case it is determined […] that it is not appropriate to use domestic prices and costs in the exporting country due to the existence in that country of significant distortions within the meaning of point (b), the normal value shall be constructed exclusively on the basis of costs of production and sale reflecting undistorted prices or benchmarks’, and ‘shall include an undistorted and reasonable amount of administrative, selling and general costs and for profits’. As further explained below, the Commission concluded in the present investigation that, based on the evidence available, the application of Article 2(6a) of the basic Regulation was appropriate.

3.1.1. Existence of significant distortions

3.1.1.1. Introduction

(88) Article 2(6a)(b) of the basic Regulation defines ‘significant distortions are those distortions which occur when reported prices or costs, including the costs of raw materials and energy, are not the result of free market forces as they are affected by substantial government intervention. In assessing the existence of significant distortions regard shall be had, inter alia, to the potential impact of one or more of the following elements: — the market in question being served to a significant extent by enterprises which operate under the ownership, control or policy supervision or guidance of the authorities of the exporting country, — state presence in firms allowing the state to interfere with respect to prices or costs, — public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces, — the lack, discriminatory application or inadequate enforcement of bankruptcy, corporate or property laws, — wage costs being distorted, — access to finance granted by institutions which implement public policy objectives or otherwise not acting independently of the state’.

(89) According to Article 2(6a)(b) of the basic Regulation, the assessment of the existence of significant distortions within the meaning of Article 2(6a)(a) shall take into account, amongst others, the non-exhaustive list of elements in the former provision. Pursuant to Article 2(6a)(b)of the basic Regulation, in assessing the existence of significant distortions, regard shall be had to the potential impact of one or more of these elements on prices and costs in the exporting country of the product concerned. Indeed, as that list is non-cumulative, not all the elements need to be given regard to for a finding of significant distortions. Moreover, the same factual circumstances may be used to demonstrate the existence of one or more of the elements of the list. However, any conclusion on significant distortions within the meaning of Article 2(6a)(a) must be made on the basis of all the evidence at hand. The overall assessment on the existence of distortions may also take into account the general context and situation in the exporting country, in particular where the fundamental elements of the exporting country’s economic and administrative set-up provides the government with substantial powers to intervene in the economy in such a way that prices and costs are not the result of the free development of market forces.

(90) Article 2(6a)(c) of the basic Regulation provides that ‘[w]here the Commission has well-founded indications of the possible existence of significant distortions as referred to in point (b) in a certain country or a certain sector in that country, and where appropriate for the effective application of this Regulation, the Commission shall produce, make public and regularly update a report describing the market circumstances referred to in point (b) in that country or sector’.

(91) Pursuant to this provision, the Commission has issued a country report concerning the PRC (hereinafter ‘the Report’) (9), showing the existence of substantial government intervention at many levels of the economy, including specific distortions in many key factors of production (such as land, energy, capital, raw materials and labour) as well as in specific sectors (such as steel and chemicals). The Report was placed on the investigation file at the initiation stage. The complaint also contained some relevant evidence complementing the Report. Interested parties were invited to rebut, comment or supplement the evidence contained in the investigation file at the time of initiation.

(92) The complaint contained information on a number of distortions in the PVA market in China. First, the prices of raw materials needed to produce VAM: petroleum, natural gas or coal are distorted, due to governmental intervention in form of sectoral plans, presence of SOEs and subsidies. Secondly, the complainant refers to distortions in the cost of other intermediary materials, notably in the chemical sector. The complainant mentions the problem of overcapacity in the chemical sector, presence of SOEs and very low production utilisation in methanol, acetic acid, calcium carbide and acetylene having an impact on the prices of those materials. Third, the complainant lists the distortions in the cost of energy due to state interference by governmental pricing policy, presence of SOEs and preferential energy prices for certain industries, such as the producers of calcium carbide. Furthermore, the complaint mentions supply of capital, access to finance, as well as lack of effective environmental controls as factors having impact on prices in China. Finally, the complaint points out that the largest PVA producers are SOEs and that there are ambitious plans to further expand the PVA industry in Inner Mongolia, which point to the involvement of the Chinese state.

(93) As indicated in recital (42), the GOC did not comment or provide evidence supporting or rebutting the existing evidence on the case file, including the Report and the additional evidence provided by the complainant, on the existence of significant distortions and/or on the appropriateness of the application of Article 2(6a) of the basic Regulation in the case at hand. Only following the final disclosure did the GOC comment on the Report and evidence concerning the existence of significant distortions. The GOC submitted, first, that the publication of the Report put the EU industry in an advantageous position when bringing complaints. In the GOC’s view, this allows for judgment without trial, it goes against the spirit of rule of law and it results in punishing certain business in the name of national or sectorial distortions. Second, the GOC submitted that the Commission has issued only one report, i.e. the Report on China. Third, according to the GOC, the Commission has not carried out any evaluation on whether the EU market or markets of its Member States would contain the elements of significant distortions. Neither has a similar evaluation been carried out in the context of determining the appropriate representative country in investigations. Fourth, the GOC submitted that the content of the Report is misrepresentative, one-sided, or even absurd, severely deviating from the facts. Relying on the Report instead of an actual investigation is, according to the GOC’s submission, manifestly inconsistent with the principle of due process. Fifth, the GOC raised the question whether the Report, as a Commission staff working document, complies with the criteria of the basic Regulation requiring a report to be produced, made public and regularly updated by the Commission.

(94) In reply to the GOC’s comments, the Commission notes, first, that according to Article 2(6a)(c) of the basic Regulation, where the Commission has well-founded indications of the possible existence of significant distortions in country or sector, it is under an obligation to produce a report describing the relevant market circumstances. According to the same provision of the basic Regulation, the possibility for interested parties to rely on the evidence contained in such report is complemented by a corresponding possibility for other interested parties to rebut, supplement or comment on the report and its evidence. Second, as the Commission has publicly stated at various occasions, the reason to publish a reports on China first was motivated by the relative importance of China in the Commission’s trade defence practice. This does not mean that the Commission would intend to only publish the Report. The Commission is considering similar reports about other countries Third, the Commission recalls that for the purpose of establishing the existence of significant distortions in the sense of 2(6a)(b) of the basic Regulation, the potential impact of one or more of the elements listed in that provision is analysed on prices and costs in the exporting country. The cost structure and price formation mechanisms in other markets, such as in the EU, are not taken into consideration in this context. In addition, the process of selecting a representative country is described in detail below in Section 3.1.2. Fourth, the Commission notes that the GOC fails to indicate specific instances of where it considers the Report being misrepresentative, one-sided or absurd in view of which the Commission is not in position to address such general allegations. Nevertheless, with respect to the principle of due process, the Commission refers to the various instances in the course of the present investigation where interested parties, including the GOC, were given an opportunity to participate in the investigations, including to comment on the existence of significant of significant distortions (see above, recitals (3) and (25)). Fifth, the Commission notes that Article 2(6a)(c) of the basic Regulation does not prescribe a specific format for the reports on significant distortions, neither does that provision define a channel for publication or intervals for updating the reports. The Commission can only reiterate once again that while being given ample opportunity to comment on the content of the Report, the GOC has chosen not to do so (see recitals (37) and (42) above). For all these reasons, the Commission rejected the arguments raised by the GOC.

(95) Further comments concerning the existence of significant distortions were submitted on behalf of all three exporting producers. First, they claimed that sections of the Report referred to in the complaint, did not prove there is anything that can amount to significant price distortions such that the methodology under Article 2(6a) of the basic Anti-Dumping Regulation was applicable. Rather, the Report only claimed some alleged government interventions in some markets in China, notably in the energy sector.

(96) Secondly, they claimed that the EU should not deviate from the standard methodology in establishing the normal value that is to use only domestic prices and costs of the exporting country, unless the ADA permits otherwise. In light of the above, the EU should follow the standard methodology in accordance with Article 2 of the ADA. Moreover, the interested parties also claimed that the notion of significant distortions does not even exist in the ADA. According to the submitted comments: 1. there is no legal basis in the ADA or in GATT 1994 for such specific action; and 2. the EU – Biodiesel (Argentina) case establishes that investigating authorities must use the production costs actually incurred by producers or exporters for the calculation of constructed normal value. As a result, the construction of the normal value is not consistent with Articles 2.2 and 2.2.1.1 of the ADA.

(97) To reply to the first argument, the Commission recalls that the Notice of Initiation (10) referred to a number of irregularities in the Chinese PVA market, including ‘inter alia, in Section 4.2.1 “Structure of the Chinese Planning System”, Section 10.1.1 “Energy Market Overview”, Section 10.1.2 “Plans” in the Energy sector, Section 10.2.1.2 “Price Differentiation”, Section 11.2 “Access to Capital”, Section 11.4.4.1 “Evergreening and Zombie Companies”, Section 11.4.4 “Government Response to Debt a Risk”, Section 16.2.5 “State-Owned Enterprises” in the Chemical Sector, Section 16.3 “Regulatory Framework/Quantitative Development Targets” and Section 16.2.6 “Overcapacity” of the country report.’ Furthermore, the Notice of Initiation referred to the 12th and 13th Five Year Plans as well as a number of reports referred to by the complainant. Therefore the Commission considers that the list of evidence listed in the Notice of Initiation was sufficient to warrant initiation of an investigation on the basis of Article 2(6a) of the basic Regulation.

(98) Second, for the purpose of this investigation the Commission has concluded in recital (171) that it is appropriate to apply Article 2(6a) of the basic Regulation. The Commission does not agree with the submission of the interested party that the Commission must not apply Article 2(6a). On the contrary, the Commission considers that Article 2(6a) is applicable and must be applied in the circumstances of this case. In addition, the Commission considers that this provision is consistent with the European Union’s WTO obligations. It is the Commission’s view that, as clarified in DS473 EU-Biodiesel (Argentina), the provisions of the basic Regulation that apply generally with respect to all WTO Members, in particular Article 2(5), second sub-paragraph, permit the use of data from a third country, duly adjusted when such adjustment is necessary and substantiated. The Commission finally recalled that the dispute DS473 EU-Biodiesel (Argentina) did not concern the application of Article 2(6a) of the basic Regulation, which is the relevant legal basis for the determination of normal value in this investigation. Therefore, the Commission rejected this claim.

(99) Furthermore, one interested party, namely Wacker, submitted comments with regard to the existence of significant distortions. First, Wacker submitted that the methodology set out under Article 2(6a) of the Basic AD Regulation is inconsistent as such with Articles 2.1 and 2.2.2 of the Anti-Dumping Agreement. This is because, the concept of ‘dumping’ concerns the pricing behaviour of individual exporters/foreign producers, as noted by the Appellate Body in US – Stainless Steel from Mexico, para. 86. Furthermore, Article 2.2 of the ADA doesn’t allow for the possibility to resort to the calculation of cost of production based on costs from outside the country where the exported product originates. Last, [Wacker] submitted that the Commission intends to use third country costs for all the Chinese factors of production, which is inconsistent with Article 2.2.1.1 of the ADA as also confirmed by the Appellate Body in EU – Biodiesel (Argentina) and by the Panel in EU – Biodiesel (Indonesia).

(100) The question of Article 2(6a) compatibility with WTO law was already discussed in recital (98) above.

(101) Secondly, Wacker claimed that as clarified by the Appellate Body in US – Carbon Steel (India), the mere fact the government is a predominant supplier of a good in a country does not make prices in that country low/cheap/distorted or non-market oriented.

(102) The Commission recalled that the US – Carbon Steel (India) dispute concerned countervailing measures and thus deals with the compatibility of the measures with the SCM Agreement. Therefore, the findings in this case are irrelevant for an anti-dumping investigation, which is subject to ADA.

(103) Third, the adjustment of the selling, general and administrative costs (‘SG&A’) and the cost of production on account of the alleged distortion of the raw material costs as well as labour costs among others, is inconsistent with Article 2.2.2 of the ADA. In any event, Wacker claimed that the application of Article 2(6a) cannot be justified as there is no distortion of input costs or SG&A.

(104) The Commission noted that once it is determined that due to the existence of significant distortions for the exporting country in accordance with Article 2(6a)(b) basic Regulation it is not appropriate to use domestic prices and costs in the exporting country, the normal value in the country of origin is constructed by reference to undistorted prices or benchmarks in an appropriate representative country for each exporting producer according to Article 2(6a)(a). The same provision of the basic Regulation also allows the use of domestic costs if they are positively established not to be distorted. Therefore, the exporting producers had the possibility to provide evidence that their individual SG&A costs and/or other input costs of were actually undistorted. However, as evidenced in sections 3.1.1.2 to 3.1.1.9, the Commission has established the existence of distortions in the PVA industry and there was no evidence as to the factors of production of individual exporting producers being undistorted. Therefore, these claims were rejected.

(105) Fourth, Wacker claimed that the fact that the Chinese PVA producers are largely state-owned is irrelevant to the present dumping investigation as the Chinese PVA market is completely market based.

(106) The Commission recalled that according to Article 2(6a)(b) of the basic Regulation, state ownership can be an important indicator of the existence of the significant distortions. Even the privately owned PVA producers, as described in detail in sections 3.1.1.3 and 3.1.1.4, operate in the environment dominated by the state presence and guidance of the PVA industry as well as the industries related to PVA production, such as producers of raw materials for the production of PVA.

(107) Fifth, Wacker submitted that the cost of coal, gas, crude oil and electricity is not distorted in China and in fact China is an importer of coal and gas and electricity prices are often higher than in other countries. Therefore, the Commission should use the Chinese prices for those inputs.

(108) The Commission recalls that it doesn’t have convincing evidence to establish that certain costs are not distorted. It is also noted in recital (169) that, according to evidence on the file, all the sampled exporting producers sourced all their main inputs in the PRC. Since the Commission established country wide presence of significant distortions in the PVA sector in accordance with Article 2(6a)(b) of the basic Regulation and there is no evidence according to Article 2(6a)(a) third dash of the basic Regulation, the Commission rejected this claim.

(109) In their comments on final disclosure, one Union producer / user re-submitted a set of comments essentially identical to those described in recital (99) above, insisting that Article 2(6a) of the basic Regulation is inconsistent as such with Articles 2.2 and 2.2.2 of ADA and that the Commission, while stating that Article 2(6a) is consistent with the EU’s WTO obligations, does not provide any further explanation about the legal grounds to support its statement. Instead, the Commission allegedly contradicts itself and is scrambling to find a legal justification for the application of Article 2(6a) of the basic Regulation.

(110) Referring to Article 2.2 of the ADA, the Union producer / user submitted further in this connection that the construction of normal value is permissible only in three specific situations specified in that provision and that this list of such situations is exhaustive. Consequently, the Union producer / user argues that before resorting to construct the normal value, the Commission had to establish that one of the three situations outlined in Article 2.2 of ADA exists rather than focus on demonstrating the existence of supposed distortions in the Chinese economy. In the Union producer / the user’s view, Article 2.2 of ADA does not permit any exception on the grounds of cost distortions.

(111) One user submitted a similar line of arguments, even quoting the above argumentation of the Union producer / user. Correspondingly, this other user considered the methodology applied by the Commission to be in violation of WTO law because the ADA only permits the use the cost of production to calculate the normal value when there are no sales in the ordinary course of trade in the domestic market because or in case of a particular market situation affecting the comparability of the prices. In addition, the user submits that should the significant distortions referred to by the Commission be considered to amount to a particular market situation, such distortions would equally affect Chinese domestic and the export prices which in turn would prohibit the Commission to depart from using the sales prices in the PRC.

(112) Similarly to the above arguments of the Union producer / user, one sampled exporting producer submitted in its comments on final disclosure that the use of Article 2(6a) of the basic Regulation results in various violations of Article 2 ADA which, in the exporting producer’s view is confirmed by several Panel and Appellate Body Reports.

(113) Identical arguments were presented also in other sampled exporting producers’ comments on final disclosure, submitting that the Commission not failed to establish normal value by conducting a strict comparison with Chinese prices or costs but that if effectively ignored Article 2 ADA altogether. To illustrate the alleged shortcomings of the Commission’s approach, which, according to the sampled exporting producers, results in inflated dumping margins, the producers provide an illustrative alternative approach on how the normal value could be established. In addition, these sampled exporting producers referred to the findings of the panel in the DS494 EU – Cost adjustment methodologies (Russia). The sampled exporting producers submitted that the findings of the panel would support their view that Article 2(6a) of the basic Regulation is WTO inconsistent since, according to the sampled exporting producers, Article 2(6a) of the basic Regulation is nothing more than a reinforced Article 2(5).

(114) In addition, the GOC considered constructing the normal value in line Article 2(6a) of the basic Regulation as inconsistent with Article 2.2 of the ADA which provides an exhaustive list of three situations where the normal value can be constructed, none of which covers the conditions foreseen by Article 2(6a) of the basic Regulation. Moreover, the GOC took the view that when constructing normal value WTO rules require using the cost of production in the country of origin plus a reasonable amount for administrative, selling and general costs and for profits when constructing normal value. However, Article 2(6a) of the Basic AD Regulation broadened the scope of data sources to include the costs of production and sale in an appropriate representative country, or international prices, costs or benchmarks.

(115) In its comments on final disclosure, one interested party, without elaborating further on its argument, claimed that the Commission was not entitled to resort to a constructed normal value.

(116) In reply to the Union producer / the user’s arguments, the Commission reiterates its position explained above in recital (98) that Article 2(6a) of the basic Regulation is fully consistent with the European Union’s WTO obligations. Union producer / the user’s argument therefore must be rejected. The corresponding arguments of the sampled exporting producers, the interested party and the GOC described above in recitals (112) – (115) are rejected for the same reasons. As for the alternative approach to construct normal value proposed by some sampled exporting producers, this argument is addressed below in recital (271). As for the reference to DS494 EU – Cost adjustment methodologies (Russia), the Commission notes moreover that the panel explicitly stated that Regulation 2017/2321 (11) which had introduced Article 2(6a) into the basic Regulation was not within its terms of reference.

(117) In their comments on final disclosure, the same Union producer / user further submitted that it had provided significant evidence from the Commission’s own reports on the electricity and gas markets showing that the electricity and LNG costs in China are higher than in the EU Member States and were higher in China during 2018 and 2019. In this respect, the Union producer / user claimed that the Commission had not addressed that evidence but had instead reversed the burden of proof in noting that none of the Chinese companies proved that their costs were not distorted. the Union producer / user argued in this connection that the Commission’s burden of proof is not discharged by primarily relying on the Report which is in any event based on historical information preceding the investigation period, which does not specifically cover the PVA sector and which does not take into account the Commission’s own finding that Chinese electricity, gas, and oil prices are higher than in EU Member States.

(118) In reply to the Union producer / user’s arguments, the Commission recalls that the existence of significant distortions under Article 2(6a) of the basic Regulation is not a function of absolute or relative values of certain inputs, such as electricity, gas or oil. Instead, the relevant criterion to establish the existence of significant distortions is whether reported prices or costs, including the costs of raw materials and energy, are not the result of free market forces because they are affected by substantial government intervention. The Commission carried out the assessment in sections 3.1.1.2 to 3.1.1.9 below and, on the basis of this analysis, concluded in section 3.1.1.10 that it is not appropriate to use domestic prices and costs to establish normal value. The Commission recalls further that where prices and costs are affected by significant distortions, domestic costs can only be used as a source to construct normal value to the extent that they are positively established not to be distorted, on the basis of accurate and appropriate evidence. However, as explained above in recital (108) there is no accurate and appropriate evidence to that effect. Union producer / user’s argument that the Commission reversed the burden of proof must therefore be rejected.

(119) In an additional argument submitted upon final disclosure, Union producer / user claimed that the way in which the Commission constructed the normal value is illegal since the Commission disregarded the requirements of the last sentence of Article 2.2 of ADA. Referring to the EU-Biodiesel (Argentina) dispute, the Union producer / user submitted that when relying on any out-of-country information to determine the cost of production, the Commission is obliged to ensure that such information is used to arrive at the cost of production in the country of origin. However, the Commission has simply replaced the production/ input costs of the Chinese PVA exporting producers with Turkish costs, failing to make the relevant adjustments. This resulted in inflated raw material costs since the Commission, on the one hand, included domestic transport costs, international freight and insurance costs, as well as import duties from the Turkish benchmark costs and, on the other hand, the Commission has made no effort to adapt the Turkish import prices to reflect the cost of production in China. To illustrate the allegedly inflated and illogical Turkish costs used by the Commission to construct normal value, the Union producer / user submits that it purchases certain raw materials, such as acetic acid or coal, at the EU market at a significantly lower price than the Turkish benchmark prices used by the Commission.

(120) The same line of argumentation was echoed by one user which, in its comment on final disclosure, submitted that the normal value calculation of the Commission in EU – Biodiesel (Argentina) is similar to the methodology described by Article 2(6a) of the basic Regulation and the Commission cannot therefore dismiss the Appellate Body's decision in EU – Biodiesel (Argentina) by merely stating that Article 2(6a) of the basic Regulation was only introduced later on.

(121) In reply to the Union producer / user’s argument, the Commission reiterates first of all, as already stated above in recital (98), that the dispute DS473 EU-Biodiesel (Argentina) did not concern the application of Article 2(6a) of the basic Regulation, which is the relevant legal basis for the determination of normal value in this investigation. According to Article 2(6a)(a), the normal value in the country of origin should reflect the undistorted price of the raw materials in the representative country which, in the present case, is Turkey. Union producer / user’s references to its own purchasing prices in the EU are therefore not relevant for the purpose of constructing the normal value. In the same vein, Union producer / user’s argument that the Commission has made no effort to adapt the Turkish import prices to reflect the distorted cost of production in China ignores the fact under Article 2(6a)(a) the normal value needs to reflect an undistorted price of the raw materials, based on information from the representative country. Union producer / user’s argument that domestic transport costs, freight and insurance and import duties should be disregarded must also be rejected, as explained in more detail below in recital (269).

(122) The argument that the Commission cannot depart from domestic prices referring merely to the fact that the provision of Article 2(6a) of the basic Regulation was introduced later than the EU-Biodiesel (Argentina) must be also rejected. As stated already above in recital (98), the EU-Biodiesel (Argentina) did not concern the application of Article 2(6a). Consequently, the Commission considers the EU-Biodiesel (Argentina) decision as not relevant in the present case not due to the point in time when Article 2(6a) was introduced into the basic Regulation but because of its distinct legal nature. In any event the EU-Biodiesel (Argentina) case confirms that there are circumstances in which the normal value in the country of origin may be constructed by having regard to information from a representative third country.

(123) The Commission examined whether it was appropriate or not to use domestic prices and costs in the PRC, due to the existence of significant distortions within the meaning of point (b) of Article 2(6a) of the basic Regulation. The Commission did so on the basis of the evidence available on the file, including the evidence contained in the Report, which relies on publicly available sources. That analysis covered the examination of the substantial government interventions in the PRC’s economy in general, but also the specific market situation in the relevant sector including the product concerned.

3.1.1.2. Significant distortions affecting the domestic prices and costs in the PRC

(124) The Chinese economic system is based on the concept of ‘socialist market economy’. That concept is enshrined in the Chinese Constitution and determines the economic governance of the PRC. The core principle is the ‘socialist public ownership of the means of production, namely, ownership by the whole people and collective ownership by the working people’. The State-owned economy is the ‘leading force of the national economy’ and the State has the mandate ‘to ensure its consolidation and growth’ (12). Consequently, the overall setup of the Chinese economy not only allows for substantial government interventions into the economy, but such interventions are expressly mandated. The notion of supremacy of public ownership over the private one permeates the entire legal system and is emphasized as a general principle in all central pieces of legislation. The Chinese property law is a prime example: it refers to the primary stage of socialism and entrusts the State with upholding the basic economic system under which the public ownership plays a dominant role. Other forms of ownership are tolerated, with the law permitting them to develop side by side with the State ownership (13).

(125) In addition, under Chinese law, the socialist market economy is developed under the leadership of the Chinese Communist Party (‘CCP’). The structures of the Chinese State and of the CCP are intertwined at every level (legal, institutional, personal), forming a superstructure in which the roles of CCP and the State are indistinguishable. Following an amendment of the Chinese Constitution in March 2018, the leading role of the CCP was given an even greater prominence by being reaffirmed in the text of Article 1 of the Constitution. Following the already existing first sentence of the provision: ‘[t]he socialist system is the basic system of the People’s Republic of China’ a new second sentence was inserted which reads: ‘[t]he defining feature of socialism with Chinese characteristics is the leadership of the Communist Party of China.’ (14) This illustrates the unquestioned and ever growing control of the CCP over the economic system of the PRC. This leadership and control is inherent to the Chinese system and goes well beyond the situation customary in other countries where the governments exercise general macroeconomic control within the boundaries of which free market forces are at play.

(126) The Chinese State engages in an interventionist economic policy in pursuance of goals, which coincide with the political agenda set by the CCP rather than reflecting the prevailing economic conditions in a free market (15). The interventionist economic tools deployed by the Chinese authorities are manifold, including the system of industrial planning, the financial system, as well as the level of the regulatory environment.

(127) First, on the level of overall administrative control, the direction of the Chinese economy is governed by a complex system of industrial planning which affects all economic activities within the country. The totality of these plans covers a comprehensive and complex matrix of sectors and crosscutting policies and is present on all levels of government. Plans at provincial level are detailed while national plans set broader targets. Plans also specify the means in order to support the relevant industries/sectors as well as the timeframes in which the objectives need to be achieved. Some plans still contain explicit output targets while this was a regular feature in previous planning cycles. Under the plans, individual industrial sectors and/or projects are being singled out as (positive or negative) priorities in line with the government priorities and specific development goals are attributed to them (industrial upgrade, international expansion etc.). The economic operators, private and State-owned alike, must effectively adjust their business activities according to the realities imposed by the planning system. This is not only because of the binding nature of the plans but also because the relevant Chinese authorities at all levels of government adhere to the system of plans and use their vested powers accordingly, thereby inducing the economic operators to comply with the priorities set out in the plans (see also section 3.1.1.5 below) (16).

(128) Second, on the level of allocation of financial resources, the financial system of the PRC is dominated by the State-owned commercial banks. Those banks, when setting up and implementing their lending policy need to align themselves with the government’s industrial policy objectives rather than primarily assessing the economic merits of a given project (see also section 3.1.1.8 below) (17). The same applies to the other components of the Chinese financial system, such as the stock markets, bond markets, private equity markets etc. Also these parts of the financial sector other than the banking sector are institutionally and operationally set up in a manner not geared towards maximizing the efficient functioning of the financial markets but towards ensuring control and allowing intervention by the State and the CCP (18).

(129) Third, on the level of regulatory environment, the interventions by the State into the economy take a number of forms. For instance, the public procurement rules are regularly used in pursuit of policy goals other than economic efficiency, thereby undermining market based principles in the area. The applicable legislation specifically provides that public procurement shall be conducted in order to facilitate the achievement of goals designed by State policies. However, the nature of these goals remains undefined, thereby leaving broad margin of appreciation to the decision-making bodies (19). Similarly, in the area of investment, the GOC maintains significant control and influence over the destination and magnitude of both State and private investment. Investment screening as well as various incentives, restrictions, and prohibitions related to investment are used by authorities as an important tool for supporting industrial policy goals, such as maintaining State control over key sectors or bolstering domestic industry (20).

(130) In sum, the Chinese economic model is based on certain basic axioms, which provide for and encourage manifold government interventions. Such substantial government interventions are at odds with the free play of market forces, resulting in distorting the effective allocation of resources in line with market principles (21).

3.1.1.3. Significant distortions according to Article 2(6a)(b), first indent of the basic Regulation: the market in question being served to a significant extent by enterprises which operate under the ownership, control or policy supervision or guidance of the authorities of the exporting country

(131) In the PRC, enterprises operating under the ownership, control and/or policy supervision or guidance by the State represent an essential part of the economy.

(132) The GOC and the CCP maintain structures that ensure their continued influence over enterprises, and in particular State-owned enterprises (SOEs). The State (and in many aspects also the CCP) not only actively formulates and oversees the implementation of general economic policies by individual SOEs, but it also claims its rights to participate in operational decision making in SOEs. This is typically done through rotation of cadres between government authorities and SOEs, through presence of party members on SOEs executive bodies and of party cells in companies (see also section 3.1.1.4), as well as through shaping the corporate structure of the SOE sector (22). In exchange, SOEs enjoy a particular status within the Chinese economy, which entails a number of economic benefits, in particular shielding from competition and preferential access to relevant inputs, including finance (23).

(133) Specifically in the PVA sector, a substantial degree of ownership by the GOC persists. Out of the sampled companies, Anhui Wan Wei High Tech Materials belonging to the Wan Wei Group is a SOE with an annual capacity of 350 000 tonnes/year, accounting for 28 % of the nominal domestic PVA production capacity and 40 % of the actual production capacity (24). It is also the largest PVA producer in China, next to Sinopec and Inner Mongolia Shuangxin (25). Mengwei, another company belonging to the Wan Wei Group, is actively promoted to become a major PVA producer as part of the industrialisation project of Inner Mongolia. According to the Mengwei’s website: ‘The annual output of the project is 200 000 tonnes of vinyl acetate (VAC) and 100 000 tonnes of PVA, with a total investment of about 1,5 billion yuan, which is the largest one-time investment capacity PVA project in China. […] The company plans to continue to invest more than 7 billion yuan during the “12th Five Year Plan” period, and then build a 100 000 tonne PVA production line, […] At that time, a new modern industrial city will stand on the beautiful land of Inner Mongolia (26).’

(134) Sinopec Group is another major Chinese SOE and a PVA producer. Chongqing Chuanwei Chemical Co., Ltd with a capacity of 160 000 tonnes per year of polyvinyl alcohol (27) and was launched as an official project of the government of China: ‘The project started construction on April 17, 2009 and was listed by the Ministry of Industry and Information Technology as a key construction project to boost domestic demand (28).’

(135) The third sampled company, Inner Mongolia Shuangxin, even though is a privately owned enterprise, has governmental links through the party organisation (see recital (140).

(136) With the high level of government intervention in the PVA industry and a high share of SOEs in the sector, even privately owned producers are prevented from operating under market conditions. Indeed, both public and privately owned enterprises in the PVA sector are also subject to policy supervision and guidance as set out in section 3.1.1.5 below.

3.1.1.4. Significant distortions according to Article 2(6a)(b), second indent of the basic Regulation: State presence in firms allowing the state to interfere with respect to prices or costs

(137) Apart from exercising control over the economy by means of ownership of SOEs and other tools, the GOC is in position to interfere with prices and costs through State presence in firms. While the right to appoint and to remove key management personnel in SOEs by the relevant State authorities, as provided for in the Chinese legislation, can be considered to reflect the corresponding ownership rights (29), CCP cells in enterprises, state owned and private alike, represent another important channel through which the State can interfere with business decisions. According to the PRC’s company law, a CCP organisation is to be established in every company (with at least three CCP members as specified in the CCP Constitution (30)) and the company shall provide the necessary conditions for the activities of the party organisation. In the past, this requirement appears not to have always been followed or strictly enforced. However, since at least 2016 the CCP has reinforced its claims to control business decisions in SOEs as a matter of political principle. The CCP is also reported to exercise pressure on private companies to put ‘patriotism’ first and to follow party discipline (31). In 2017, it was reported that party cells existed in 70 % of some 1,86 million privately owned companies, with growing pressure for the CCP organisations to have a final say over the business decisions within their respective companies (32). These rules are of general application throughout the Chinese economy, across all sectors, including to the producers of PVA and the suppliers of their inputs.

(138) Specifically in the PVA sector, as already pointed out, many of the PVA producers are owned by the State. Wan Wei Group’s Mengwei, which was part of the sample, is subject to SASAC administration, for example it’s PVA production project is described in the following way: ‘Phase II of the Mengwei 100 000 tonnes/year special polyvinyl alcohol resin project and […] are the fund-raising projects included in the company's “Plan for 2015 non-public Development Bank A-share stock”. They have been approved by the State-owned Assets Supervision and Administration Commission of the People’s Government of Anhui Province (Letter [2015] 599): “Approval on relevant matters of non-public Development Bank stock of Anhui Wan Wei high tech materials Co., Ltd” as was also approved by the first extraordinary general meeting of shareholders of 2015.’ (33). Furthermore, Wan Wei is subject to party building activities: ‘Regarding the construction of the party's work style and clean government in the next stage, Wu Shangyi, the person in charge of the Discipline Inspection Committee of the joint-stock company, pointed out that one must accurately grasp the situation of the construction of the party’s work style, […] focus on the current central work of Anhui's reform and development, with style construction as the main line, and further create a clean and upright corporate environment to provide a strong disciplinary guarantee for the high-quality development of the group company. Tang Xiaohong, deputy secretary of the Discipline Inspection Commission of the group company, put forward: […] solidly promote the implementation of the party style and clean government […]’ (34).

(139) Sinopec, another company sampled in the investigation is also an SOE and underlines it’s adherence to the party principles in numerous instances. According to the Sinopec website: ‘In 2018, the company adhered to the guidance of Xi Jinping's new era socialist ideology with Chinese characteristics and the spirit of the 19th National Congress of the Party, fully implemented the general requirements for party building in the new era, closely focused on the strategic deployment of building a world-class enterprise, and led by political construction, vigorously strengthen the capacity building of the party committees of directly-owned enterprises to manage the overall situation, vigorously implement the grassroots party organization organizational improvement project, vigorously enhance the vitality of team officers and entrepreneurship, coordinate and strengthen all party construction work, and continuously improve the quality of party construction to provide a strong guarantee for building Sinopec into a world-class enterprise with global competitiveness. Adhere to study, propaganda and implementation of Xi Jinping's new era of socialism with Chinese characteristics and the spirit of the 19th National Congress of the Communist Party as the primary political task, and adopt a variety of methods such as touring, special training, and themed Party Day to promote learning, thinking, and practice. Unity, education and guidance of party members and cadres continue to strengthen the consciousness and consciousness of resolutely achieving “two safeguards,” and practice loyalty to the party with practical actions (35).’

(140) Inner Mongolia Shuangxin lists on its website party building activities in the following way: ‘The company established a party branch in 2005. In May 2012, the organization Department of the Otog Banner Committee of the Chinese Communist Party formally approved our company to establish the Party Committee of Inner Mongolia Shuangxin Resources Holdings Co., Ltd and convened its first party member congress. Related subsidiaries have set up a second-level party committee (with 5 party branches under their jurisdiction), 2 general party branches (with 3 party branches under their jurisdiction), and 3 party branches (36)’.

(141) The State’s presence and intervention in the financial markets (see also section 3.1.1.8 below) as well as in the provision of raw materials and inputs further have an additional distorting effect on the market (37). Thus, the State presence in firms, including SOEs, in the PVA and other related sectors (such as the financial and input sectors further discussed in Section 3.1.1.7 below) allow the GOC to interfere with respect to prices and costs.

3.1.1.5. Significant distortions according to Article 2(6a)(b), third indent of the basic Regulation: public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces

(142) The direction of the Chinese economy is to a significant degree determined by an elaborate system of planning which sets out priorities and prescribes the goals the central and local governments must focus on. Relevant plans exist on all levels of government and cover virtually all economic sectors. The objectives set by the planning instruments are of binding nature and the authorities at each administrative level monitor the implementation of the plans by the corresponding lower level of government. Overall, the system of planning in the PRC results in resources being driven to sectors designated as strategic or otherwise politically important by the government, rather than being allocated in line with market forces (38).

(143) The PVA industry is regarded as an important industry by the GOC. This is confirmed in the numerous plans, directives and other documents focused on the chemical sector and PVA in particular, which are issued at national, regional and municipal level, including the documents listed in the following recitals.

(144) PVA is mentioned in the National Development and Reform Commission (NDRC) Decision on the provisions amending the ‘Guiding Catalogue for Industry Restructuring (2011 edition) (39) (applicable during the IP). PVA appears in the chapter on encouraged sectors: ‘19-Light industry: 14: New packaging materials such as vacuum coated aluminium, silicon oxide spray, PVA coating-type film, Functional polyester (PET) film, oriented polystyrene (OPS) film, paper-plastic based multilayer extrusions or compounds.’, furthermore, it is listed in the chapter on restricted sectors: ‘Textile: 13: Adopting polyvinyl alcohol slurry (PVA) sizing technology and products (polyester and cotton products, except high-count high-density products of pure cotton)’ as well as in the chapter on eliminated sectors/ obsolete products: ‘Polyvinyl alcohol and its acetals for interior and exterior walls (106, 107 coatings, etc.)’. Those instances show that GOC is steering the PVA industry and the use of PVA in different sectors.

(145) The Guiding Catalogue was in the meantime updated and the new version, in force as from 1 January 2020 (40) In this new version, PVA appears also as an encouraged sector: ‘Light industry 11: New packaging materials such as vacuum coated aluminium, silicon oxide spray, PVA coating-type film plastic based multilayer extrusions or compounds.’. For the restricted and eliminated industries the new version of the Guiding Catalogue is identical with the version described in recital (144) above.

(146) Inner Mongolia Wuhai and surroundings’ industry transformation and upgrading plan 2016-2020 (41) mentions PVA in section IV.2: ‘fine Chemicals: -Give full play to the advantages of basic chemical industries such as chlor-alkali, coking and organic silicon, -promote horizontal connections between industries and extend the industrial chain vertically,-vigorously develop deep-processed products such as 1,4-butanediol, PVA, -foster products such as medicines, pesticides, and synthetic dyes, organic pigments, paints, functional polymer materials, -create a fine chemical industry cluster -develop a new pillar industry.’ as well as section VII.2: ‘[a]ctively support enterprises to develop international production capacity cooperation, -Encourage specific competitive products such as cement, coking, polyvinyl chloride, polyvinyl alcohol, technologies as well as equipment so as to bring them to “go out”,-explore and develop international markets.’

(147) Upon disclosure, one interested party, namely Wacker, submitted that PVA is not an encouraged industry and emphasized that the Commission itself mentions in its respective second findings of recitals (144) and (145) that PVA is listed in the chapter of restricted industries. On this basis, Wacker submits that Chinese PVA industries cannot benefit from any supposed subsidies or support available only to encouraged industries. Consequently, in Wacker’s view, the Commission’s assessment lacks factual evidence.

(148) However, Wacker’s arguments must be rejected. The relevant analysis under the third indent of Article 2(6a)(b) of the basic Regulation does not assess whether the domestic producers of the like product receive government support. Instead, the analysis looks into the question whether public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces exist. In this respect, listing PVA among the restricted industries demonstrates the prevalence of such public policies in the same manner as listing it among encouraged industries since the very existence of such catalogues clearly demonstrates GOC’s interference with market forces. It is for this reason that the Commission noted in recital (144) in fine that GOC is steering the PVA industry since steering, far from being limited to support, may entail a wide array of measures, including restrictions.

(149) The GOC further guides the development of the sector in accordance with a broad range of tools, for example by providing subsidies. The annual report of Wan Wei Group lists a number of subsidies devoted to PVA: the 2016 annual report lists -PVA project technical reform funds of RMB 8,6 million (42), the annual report of 2017 lists: ‘PVA Project Technological Reform allocation: RMB 7,666 million, discount on loans for technical renovation of PVA materials for waste molasses production RMB 2,819 million (43)’ as well as ‘PVA project technological transformation allocation RMB 958 333’ (44). In 2018 the company received RMB 5,7 million for PVA Project Technological Reform allocation and RMB 2,8 million interest discount on PVA technological transformation projects (45). The 2019 annual report lists an allocation of RMB 0,958 million for PVA Project Technological Reform (46).

(150) There are also a number of distortions in the main raw materials to produce PVA, such as coal, gas, calcium carbide, acetic acid and limestone. Coal is subject to different plans and other documents, such as the 13th five year plan (FYP) for Mineral Resources on the national level as well as to plans on the local level, such as the Hebei province Coal industry development plan (47). The coal industry is a substantial subsidy receiver in China which lead to overcapacity and price distortions (48). Natural gas is also subject to a number of plans, including the 13th FYP for Mineral Resources on the national level, but also to plans on the local level, such as the Hebei Province Natural Gas Development Plan. Calcium carbide production is subject to a preferential electricity rate in some provinces such as Chongqing and Shaangxi (49). It is also subject to the 13th FYP for the Petrochemical and Chemical Industry. Acetic acid is subject to NDRC’s Catalogue for Guiding Industrial Restructuring, prescribing detailed rules for different industries. Acetic acid is included in the restricted list for petrochemicals: ‘caprolactam or ethylene acetic acid with an annual output of less than 100 000 tonnes, acetic acid by oxo synthesis or methanol by natural gas with an annual output of less than 300 000 tonnes’ (50). Through these and other means, the raw materials used to produce PVA are subject to governmental intervention.

(151) In sum, the GOC has measures in place to induce operators to comply with the public policy objectives of supporting encouraged industries. Such measures impede market forces from operating normally.

3.1.1.6. Significant distortions according to Article 2(6a)(b), fourth indent of the basic Regulation: the lack, discriminatory application or inadequate enforcement of bankruptcy, corporate or property laws

(152) According to the information on file, the Chinese bankruptcy system delivers inadequately on its own main objectives such as to fairly settle claims and debts and to safeguard the lawful rights and interests of creditors and debtors. This appears to be rooted in the fact that while the Chinese bankruptcy law formally rests on principles that are similar to those applied in corresponding laws in countries other than the PRC, the Chinese system is characterised by systematic under-enforcement. The number of bankruptcies remains notoriously low in relation to the size of the country’s economy, not least because the insolvency proceedings suffer from a number of shortcomings, which effectively function as a disincentive for bankruptcy filings. Moreover, the role of the State in the insolvency proceedings remains strong and active, often having direct influence on the outcome of the proceedings (51).

(153) In addition, the shortcomings of the system of property rights are particularly obvious in relation to ownership of land and land-use rights in the PRC (52). All land is owned by the Chinese State (collectively owned rural land and State-owned urban land). Its allocation remains solely dependent on the State. There are legal provisions that aim at allocating land use rights in a transparent manner and at market prices, for instance by introducing bidding procedures. However, these provisions are regularly not respected, with certain buyers obtaining their land for free or below market rates (53). Moreover, authorities often pursue specific political goals including the implementation of the economic plans when allocating land (54).

(154) Much like other sectors in the Chinese economy, the producers of PVA are subject to the ordinary rules on Chinese bankruptcy, corporate, and property laws. That has the effect that these companies, too, are subject to the top-down distortions arising from the discriminatory application or inadequate enforcement of bankruptcy and property laws. The present investigation revealed nothing that would call those findings into question. As such, the Commission preliminarily concluded that the Chinese bankruptcy and property laws do not work properly, thus generating distortions when maintaining insolvent firms afloat and when allocating land use rights in the PRC. Those considerations, on the basis of the evidence available, appear to be fully applicable also in the PVA sector.

(155) In light of the above, the Commission concluded that there was discriminatory application or inadequate enforcement of bankruptcy and property laws in the PVA sector, including with respect to the product concerned.

3.1.1.7. Significant distortions according to Article 2(6a)(b), fifth indent of the basic Regulation: wage costs being distorted

(156) A system of market-based wages cannot fully develop in the PRC as workers and employers are impeded in their rights to collective organisation. The PRC has not ratified a number of essential conventions of the International Labour Organisation (‘ILO’), in particular those on freedom of association and on collective bargaining (55). Under national law, only one trade union organisation is active. However, this organisation lacks independence from the State authorities and its engagement in collective bargaining and protection of workers’ rights remains rudimentary (56). Moreover, the mobility of the Chinese workforce is restricted by the household registration system, which limits access to the full range of social security and other benefits to local residents of a given administrative area. This typically results in workers who are not in possession of the local residence registration finding themselves in a vulnerable employment position and receiving lower income than the holders of the residence registration (57). Those findings lead to the distortion of wage costs in the PRC.

(157) No evidence was submitted to the effect that the PVA sector, would not be subject to the Chinese labour law system described. PVA sector is thus affected by the distortions of wage costs both directly (when making the product concerned or the main raw material for its production) as well as indirectly (when having access to capital or inputs from companies subject to the same labour system in the PRC).

3.1.1.8. Significant distortions according to Article 2(6a)(b), sixth indent of the basic Regulation: access to finance granted by institutions which implement public policy objectives or otherwise not acting independently of the State

(158) Access to capital for corporate actors in the PRC is subject to various distortions.

(159) Firstly, the Chinese financial system is characterised by the strong position of State-owned banks (58), which, when granting access to finance, take into consideration criteria other than the economic viability of a project. Similarly to non-financial SOEs, the banks remain connected to the State not only through ownership but also via personal relations (the top executives of large State-owned financial institutions are ultimately appointed by the CCP) (59) and, again just like non-financial SOEs, the banks regularly implement public policies designed by the government. In doing so, the banks comply with an explicit legal obligation to conduct their business in accordance with the needs of the national economic and social development and under the guidance of the industrial policies of the State (60). This is compounded by additional existing rules, which direct finances into sectors designated by the government as encouraged or otherwise important (61).

(160) While it is acknowledged that various legal provisions refer to the need to respect normal banking behaviour and prudential rules such as the need to examine the creditworthiness of the borrower, the overwhelming evidence, including findings made in trade defence investigations, suggests that these provisions play only a secondary role in the application of the various legal instruments.

(161) Furthermore, bond and credit ratings are often distorted for a variety of reasons including the fact that the risk assessment is influenced by the firm's strategic importance to the GOC and the strength of any implicit guarantee by the government. Estimates strongly suggest that Chinese credit ratings systematically correspond to lower international ratings (62).

(162) This is compounded by additional existing rules, which direct finances into sectors designated by the government as encouraged or otherwise important (63). This results in a bias for lending to SOEs, large well-connected private firms and firms in key industrial sectors, which implies that the availability and cost of capital is not equal for all players on the market.

(163) Secondly, borrowing costs have been kept artificially low to stimulate investment growth. This ha