[pic] | EUROPEAN COMMISSION |

Brussels, 12.4.2011

COM(2011) 201 final

2011/0083 (NLE)

Proposal for a

COUNCIL REGULATION

imposing a definitive anti-subsidy duty on imports of coated fine paper originating in the People's Republic of China

EXPLANATORY MEMORANDUM

1. CONTEXT OF THE PROPOSAL

Grounds for and objectives of the proposal This proposal concerns the application of Article 10 of Council Regulation (EC) No 597/2009 of 11 June 2009 on protection against subsidised imports from countries not members of the European Community. |

General context This proposal is made in the context of the implementation of the basic Regulation and is the result of an investigation which was carried out in line with the substantive and procedural requirements laid out in the basic Regulation. |

Existing provisions in the area of the proposal Provisional anti-dumping measures were imposed on the same product group by Commission Regulation (EU) No 1042/2010 (OJ L 299, 16.12.2010, p.7). Parallel proposal to impose definitive anti-dumping measures. |

Consistency with other policies and objectives of the Union Not applicable. |

2. RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS

Consultation of interested parties |

Interested parties concerned by the proceeding have had the possibility to defend their interests during the investigation, in line with the provisions of the basic Regulation. |

Collection and use of expertise |

There was no need for external expertise. |

Impact assessment This proposal is the result of the implementation of the basic Regulation. The basic Regulation does not foresee a general impact assessment but contains an exhaustive list of conditions that have to be assessed. |

3. LEGAL ELEMENTS OF THE PROPOSAL

Summary of the proposed action On 17 April 2010, the Commission initiated an anti-subsidy proceeding concerning imports of coated fine paper originating in the People's Republic of China. The investigation found subsidisation of the product concerned, which caused injury to the Union industry. The investigation also found that it was not against the Union interest to impose anti-subsidy measures. Therefore, it is proposed that the Council adopts the attached proposal for a Regulation in order to impose definitive anti-subsidy measures on imports of coated fine paper originating in the People's Republic of China. |

Legal basis Council Regulation (EC) No 597/2009 of 11 June 2009 on protection against subsidised imports from countries not members of the European Community (‘the basic Regulation’) |

Subsidiarity principle The proposal falls under the exclusive competence of the Union. The subsidiarity principle therefore does not apply. |

Proportionality principle The proposal complies with the proportionality principle for the following reasons: |

The form of action is described in the above-mentioned basic Regulation and leaves no scope for national decision. |

Indication of how financial and administrative burden falling upon the Union, national governments, regional and local authorities, economic operators and citizens is minimized and proportionate to the objective of the proposal is not applicable. |

Choice of instruments |

Proposed instrument: Regulation. |

Other means would not be adequate because the basic Regulation does not foresee alternative options. |

4. BUDGETARY IMPLICATION

The proposal has no implication for the EU budget. |

2011/0083 (NLE)

Proposal for a

COUNCIL REGULATION

imposing a definitive anti-subsidy duty on imports of coated fine paper originating in the People's Republic of China

THE COUNCIL OF THE EUROPEAN UNION,

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

Having regard to Council Regulation (EC) No 597/2009 of 11 June 2009 on protection against subsidised imports from countries not members of the European Community[1] ('the basic Regulation'), and in particular Article 15 thereof,

Having regard to the proposal submitted by the European Commission ('the Commission') after consulting the Advisory Committee,

Whereas:

1. PROCEDURE

2. Initiation

3. On 17 April 2010, the European Commission announced by a notice published in the Official Journal of the European Union [2] ('Notice of initiation'), the initiation of an anti-subsidy proceeding with regard to imports into the Union of coated fine paper originating in the People's Republic of China ('PRC' or the 'country concerned').

4. The anti-subsidy proceeding was initiated following a complaint lodged on 4 March 2010 by CEPIFINE, the European association of fine paper manufacturers, ('the complainant') on behalf of producers representing a major proportion, in this case more than 25% of the total Union production of coated fine paper. The complaint contained prima facie evidence of subsidisation of the said product and of material injury resulting therefrom, which was considered sufficient to justify the initiation of a proceeding.

5. Prior to the initiation of the proceeding and in accordance with Article 10(7) of the basic Regulation, the Commission notified the Government of the PRC ('the GOC') that it had received a properly documented complaint alleging that subsidised imports of coated fine paper originating in the PRC were causing material injury to the Union industry. The GOC was invited for consultations with the aim of clarifying the situation as regards the contents of the complaint and arriving at a mutually agreed solution. The GOC accepted the offer of consultations and consultations were subsequently held. During the consultations, no mutually agreed solution could be arrived at. However, due note was taken of comments made by the authorities of the GOC in regard to the allegations contained in the complaint regarding the lack of countervailability of the schemes. Following the consultations, submissions were received from the GOC.

6. Anti-dumping proceeding

7. On 18 February 2010, the European Commission had announced by a notice published in the Official Journal of the European Union [3], the initiation of an anti-dumping proceeding concerning imports into the Union of coated fine paper originating in the PRC.

8. On 17 November 2010, the Commission, by Regulation (EU) No 1042/10[4], imposed a provisional anti-dumping duty on imports of coated fine paper originating in the PRC.

9. The injury analyses performed in the present anti-subsidy and the parallel anti-dumping investigation are identical, since the definition of the Union industry, the representative Union producers and the investigation period are the same in both investigations. For this reason, comments on injury aspects put forward in any of these proceedings were taken into account in both proceedings.

10. Parties concerned by the proceeding

11. The Commission officially advised the complainant, other known Union producers, the known exporting producers in the PRC and an association of producers (a paper association), the representatives of the country concerned, known importers and known users of the initiation of the proceeding. Interested parties were given the opportunity to make their views known in writing and to request a hearing within the time limit set in the Notice of initiation.

12. In view of the apparent high number of exporting producers, Union producers and unrelated importers, sampling was envisaged in the Notice of initiation in accordance with Article 27 of the basic Regulation. In order to enable the Commission to decide whether sampling would be necessary and if so, to select samples, all exporting producers and their known paper association, all Union producers and unrelated importers were asked to make themselves known to the Commission and to provide, as specified in the Notice of initiation, basic information on their activities related to the product concerned (as defined in section 2.1 below) during the period from 1 January 2009 to 31 December 2009. The authorities of the PRC were also consulted.

13. As explained in recital (51) below, two Chinese exporting producer groups provided the requested information and agreed to be included in a sample. On the basis of the above it was decided that sampling was not necessary for exporting producers in the PRC.

14. As explained in recital (53) below, it was decided that sampling was not necessary for Union producers.

15. As explained in recital (54) below, it was decided that sampling was not necessary for unrelated importers.

16. The Commission sent questionnaires to all parties known to be concerned and to all other parties that requested so within the deadlines set out in the Notice of initiation, namely the complainant, other known Union producers, the known exporting producers in the PRC and an association of producers, the representatives of the country concerned, known importers, known users.

17. Replies to the questionnaires and other submissions were received from two groups of Chinese exporting producers, the complainant association (the European association of fine paper manufacturers or ‘CEPIFINE’), the four complainant Union producers and one additional Union producer, 13 unrelated importers and traders, 5 users and one association of the printing industry.

18. The Commission sought and verified all information deemed necessary for the determination of subsidisation, resulting injury and Union interest. Verification visits were carried out at the premises of the following State authority and companies:

19. Government of the People Republic of China

20. Chinese Ministry of Commerce, Beijing, China

21. Union producers and association

22. CEPIFINE, Brussels, Belgium

23. Sappi Fine Paper Europe, Brussels, Belgium

24. LECTA Group (CARTIERE DEL GARDA SpA, Riva del Garda, Italy CONDAT SAS, Le Plessis Robinson, France and TORRASPAPEL, S.A., Barcelona, Spain), Barcelona, Spain

25. Burgo Group spa, Altavilla Vicentina, Italy and its related companies Burgo Distribuzione srl, Milan, Italy and Ebix sa, Barcelona, Spain

26. Papierfabriek Scheufelen GmbH, Lenningen, Germany

27. Exporting producers in the PRC

28. Sinar Mas Paper (China) Investment Co Ltd, the holding company of the Asia Pulp & Paper Group ('APP')

29. Gold East Paper (Jiangsu) Co., Ltd, Zhenjiang City, Jiangsu Province, PRC

30. Gold Huasheng Paper (Suzhou Industrial Park) Co., Ltd, Suzhou City, Jiangsu Province, PRC

31. Ningbo Zhonghua Paper Co., Ltd, Ningbo City, Zhejiang Province, PRC

32. Ningbo Asia Pulp & Paper Co., Ltd, Ningbo City, Zhejiang Province PRC

33. Chenming Paper Group ('Chenming')

34. Shangdong Chenming Paper Holdings Limited, Shouguang City, Shandong Province, PRC

35. Shouguang Chenming Art Paper Co., Ltd, Shouguang City, Shandong Province, PRC

36. Importers in the Union

37. Cartaria Subalpina, Turin, Italy

38. Paperlinx, Northampton, UK

39. Investigation period and period considered

40. The investigation of subsidisation and injury covered the period from 1 January 2009 to 31 December 2009 (the ‘investigation period’ or ‘IP’). The examination of trends relevant for the assessment of injury covered the period from 1 January 2006 to the end of the IP (‘the period considered’).

41. PRODUCT CONCERNED AND LIKE PRODUCT

42. Product concerned

43. The product concerned is coated fine paper which is paper or paperboard coated on one or both sides (excluding kraft paper or kraft paperboard), in either sheets or rolls, and with a weight of 70 g/m2 or more but not exceeding 400 g/m2 and brightness of more than 84 (measured according to ISO 2470-1), originating in the PRC (‘the product concerned’ or ‘CFP’) currently falling within CN codes ex 4810 13 20, ex 4810 13 80, ex 4810 14 20, ex 4810 14 80, ex 4810 19 10, ex 4810 19 90, ex 4810 22 10, ex 4810 22 90, ex 4810 29 30, ex 4810 29 80, ex 4810 99 10, ex 4810 99 30 and ex 4810 99 90.

44. CFP is high quality paper and paperboard generally used for printing of reading material such as magazines, catalogues, annual reports, yearbooks. The product concerned includes both sheets and rolls suitable for use in sheet-fed ('cut star') printing machines. Rolls suitable for use in sheet-fed presses ('cutter rolls') are designed to be cut into pieces before printing, and are thus considered to be substitutable and directly competitive with sheets.

45. The product concerned does not include rolls suitable for use in web-fed presses. Rolls suitable for use in web-fed presses are defined as those rolls which, if tested according to the ISO test standard ISO 3783:2006 concerning the determination of resistance to picking – accelerated speed method using the IGT tester (electric model), give a result of less than 30 N/m when measuring in the cross-direction of the paper (CD) and a result of less than 50 N/m when measuring in the machine direction (MD). Also, in contrast to rolls used in sheet-fed printing machines, rolls for use in web-fed presses are normally directly fed into the printing machines and are not cut beforehand.

46. One party claimed that the product scope of the investigation was too narrowly defined and that rolls of CFP suitable for web-fed printing should have been included. It was claimed that web-fed rolls and the ones included in the scope of the present investigation (cutter rolls and sheets) shared the same basic technical and physical characteristics and were not distinguishable from one another. Furthermore it was claimed that both were used for high quality printing and that they were therefore to some extent interchangeable.

47. However, in contrast to the above claim the investigation confirmed that there are indeed distinct technical and physical characteristics such as humidity and stiffness between paper used in web-fed and the one used in sheet-fed printing. The investigation further confirmed that the technical characteristics listed in recital (18) above are unique to rolls suitable for use in web-fed presses. Due to these differences paper used in web-fed or the one used in sheet-fed printing cannot be used in the same type of printing machine and they are therefore not interchangeable. It is noted that all parties agreed that the two types of paper are distinct as regards their surface strength and tensile strength.

48. Furthermore, the party in question claimed that customers view CFP in the form of sheets, cutter rolls and web rolls as a single market and thus distribution channels are the same. The different technical characteristics are only reflected in minor price differences among these product groups.

49. However, the investigation revealed that the two types of rolls are also non-interchangeable from an economic point of view because rolls for web-fed printing are used for mass-volume printing jobs and are generally made to order and require just-in-time delivery therefore these products are not stocked by intermediaries but are shipped directly to the final users, i.e. they are also sold through a different distribution channel than rolls used in sheet-fed printing. The different production process and the different economies of scale in the printing process are reflected in distinct price differences.

50. To note as well is that no rolls for use in web-fed presses were imported from the PRC during the period considered. It may also be considered unlikely that these products would be imported in the future as sourcing these products from long distance is economically not viable for the reasons mentioned in the previous recital.

51. On this basis, these claims were rejected.

52. The same party claimed that the resistance to picking was not a suitable technical characteristic for differentiating between products as this test would be of a general nature and test results may moreover be affected by the moisture content of the paper tested. The party further claimed that on the basis of some other tests conducted in its own laboratory measuring the resistance to picking of web rolls produced by the Union producers, it can be seen that these products would not fall into the current product definition which would show that the criterion of "resistance to picking" for distinguishing CFP used in web-fed and sheet-fed printing is unsuitable. With this evidence the party alleged that the exclusion of web rolls was made on an arbitrary basis.

53. No evidence was submitted with regard to the claim that the moisture content of the paper may render test results for ISO test standard ISO 3783:2006 unreliable.

54. The test results presented by the exporting producer consisted of a summary of the test results performed in its own laboratory. Crucially, the results were not made available for inspection and comments by other interested parties, in particular, the Union industry, nor did the exporting producer submit a meaningful non-confidential summary thereof despite repeated reminders.

55. After disclosure, no further detailed information was provided by the exporting producer which could help assess the reliability of the test. Since no non-confidential version of this test was provided, the companies whose web rolls were allegedly tested could not respond to the conclusions of the test. The Commission thus could not objectively check whether the submitted test results were reliable and correct and could be relied upon for the purposes of the investigation. On the basis of the facts available to the Commission, the objectivity and reliability of the test was found to be insufficient since the information submitted under confidentiality could not be counterchecked by any reliable sources.

56. After the disclosure of the findings, the same exporting producer presented the results of a further test conducted on its behalf by an external test laboratory and reiterated that CFP used in web-fed printing has been arbitrarily excluded from the scope of the investigation. The test reports stated that the resistance to picking has been measured on 25 samples of web-fed rolls provided and identified by the exporting producer to the laboratory as paper samples produced by Union producers. According to this report, none of the paper met both criteria set in recital (18) above.

57. The assessment of the test report brought to light that, first of all, the test report by the external laboratory related mostly to products for which these results were irrelevant as the vast majority of the samples tested were not in fact web rolls; secondly, the test report related to products which were not sufficiently identified as it could not be ascertained from the test report whether the paper tested was for sheet-fed printing or web-fed printing as the paper brand described in the report existed in both formats. Furthermore the test report provided no assurance that the sampled rolls indicated were indeed the ones that were tested.

58. In response to the external laboratory's test report, the complainant provided the results of the testing performed by one of the Union producers on the same samples of web rolls that were allegedly tested by the external laboratory. This test showed different results. The complainant attributed the differences to possibly different test conditions and thus a potential non-compliance with the ISO 3783:2006 standard, i.e. the standard according to which resistance to picking set in Recital (16) of the provisional Regulation should be measured.

59. After disclosing the definitive findings, the exporting producer questioned the Commission's objectivity in rejecting the test result of the external laboratory. It claimed that the testing was carried out blindly by the independent expert and in accordance with the relevant ISO standard. It provided an affidavit of its manager explaining the sourcing process of the samples used in the testing in order to prove the independence, correctness and representativeness of the testing.

60. Firstly, the objectivity of the external laboratory test report was never questioned by the Commission and in this regard it is irrelevant that the testing was carried out blindly. On the other hand, doubts were raised as to the assurances on the selection and origin of the samples tested and not on the test itself. The arguments of the exporting producer did not remove these doubts as these were not comprehensive and were unclear in several aspects, for example the inclusion of products other than web rolls were claimed to have been caused by administrative errors or were blamed on mistakes by the suppliers in providing possibly wrong samples.

61. Since both the source as well as the samples of the allegedly tested products were not clear and the results of the testing by the different parties were contradictory, it was considered that the submitted test report of the external laboratory acting on behalf of the Chinese exporting producer did not conclusively demonstrate that the resistance to picking test was not appropriate to distinguish between CFP suitable for use in web-fed printing on the one hand and CFP used in sheet-fed printing on the other hand. Consequently, the test report did not demonstrate that CFP used in web-fed printing had been arbitrarily excluded from the scope of the investigation.

62. As regards the relevance of the resistance to picking as a distinguishing criterion for rolls suitable for web-fed printing, it is recalled that in the product definition the two product groups are distinguished from each other based on, among other things, the use of the products, i.e. whether the product is suitable for use in web-fed or sheet-fed printing as determined by the requirements of the presses on which they are used which is reflected in, inter alia, the characteristic of resistance to picking. Furthermore it is noted that resistance to picking is only one of the characteristics that distinguish CFP suitable for use in web-fed printing from CFP used in sheet fed printing; recitals (18) and (20) above set out additional criteria which have not been contested by the exporting producer concerned. One party claimed that humidity as defined in recital (20) was not a distinct basic characteristic to distinguish products. During the investigation however differing claims in this regard were made by other parties. In any event, it was found that stiffness and resistance to picking are the most relevant factors.

63. In its responding submission, the complainant acknowledged that there might be rolls that do not fully meet all the criteria for resistance to picking set in recital (18) above, which could still be used in web-fed printing. However, it sustained its view that pick resistance is the only test that is able to identify with certainty that a roll is indeed suitable for web-fed printing, i.e. if a roll meets the picking resistance criteria in recital (18) above, it is certainly a web roll.

64. In support of the above claims concerning resistance to picking the exporting producer referred to arguments put forward by one of the complainant Union producers in anti-dumping and anti-subsidy investigations in the USA in which the Union producer allegedly acknowledged that web rolls cannot be differentiated based on pick resistance test or by any other measurement.

65. The complainant contested these statements of the exporting producer and claimed that contrary to what has been claimed, it follows from the proceedings in the USA that there is a clear dividing line distinguishing web rolls from CFP.

66. Firstly, it should be noted that the statements referred to by the exporting producer were presented in investigations under other jurisdictions and by different parties than the ones in the current proceeding and thus are not relevant. Secondly, the US authorities in the mentioned investigations concluded that there was a clear distinction between on one hand CFP used in sheet-fed printing and on the other hand rolls suitable for use in web-fed printing. Cutter rolls were regarded as semi-finished products while rolls suitable for web fed printing were not considered as product concerned. The US authorities did not explicitly define web rolls in their definition of the product scope.. For this reason, the criterion of resistance to picking was not relevant in the definition of the product scope in the mentioned investigations.

67. Based on the above comments, the technical characteristic "resistance to picking" was confirmed as being a reliable characteristic to describe CFP suitable for use in web-fed printing.

68. The comments put forward have however also revealed that there exist web rolls that can be used in web-fed printing even if they do not fully meet all the criteria for resistance to picking. For this reason it was considered necessary to further refine the definition of rolls suitable for web-fed printing.

69. In order to provide a further criterion to distinguish web rolls which do not fully meet all the criteria for resistance to picking, the complainant suggested that a roll which does not fully meet the picking resistance test but has an internal core size of less than 80mm, should be considered as a web roll.

70. The GOC and the exporting producer claimed that the addition of core size as a new element into the product definition constituted a revision of the definition of web rolls and thus the product concerned. It also claimed that the internal core size is not a suitable criteria as there exist web rolls with higher than 80mm core size and cutter rolls with lower than 80mm core size.

71. The Commission endeavoured to further refine the definition of rolls suitable for use in web-fed printing and to give further clarification in order to distinguish even more clearly between the product concerned and other products, also with a view to minimize the possibility of circumvention of the measures. The evidence submitted on the suitability of the core size as an alternative criterion in the definition however proved that this criterion would lead to the possible exclusion of product concerned, i.e. cutter rolls with a core size of less than 80mm from the measures. Therefore this criterion to define rolls suitable for use in web-fed printing was abandoned.

72. The above is without prejudice to the reliability of the method according to which rolls suitable for use in web-fed printing have been excluded from the scope of the investigation as it was claimed by the Chinese group of exporting producers.

73. During the course of the investigation, certain parties also claimed that multi-ply paper and multi-ply paperboard (as defined in the next recital) should be excluded from the scope of the investigation. They claimed that multi-ply paper and multi-ply paperboard had different physical characteristics such as multiple plies, higher stiffness and lower density and that the final use of these products was different as these are usually used for folding carton and packaging applications. These parties finally claimed that single-ply and multi-ply paper and paperboard would be easily distinguished by their physical appearance.

74. Multi-ply paper and multi-ply paperboard, as defined in the Harmonised System Explanatory Notes to subheading 4805, are products obtained by pressing together two or more layers of moist pulps of which at least one characteristics different from the others. These differences may arise from the nature of pulps used (e.g. recycled waste), the method of production (e.g. mechanical or chemical) or, if the pulps are of the same nature and have been produced by the same method, the degree of processing (e.g. unbleached, bleached or coloured).

75. The investigation showed that multi-ply paper and paperboard has indeed some different physical and technical characteristics; more specifically it has several layers of pulp giving it an increased rigidity. Multi-ply paper and paperboard is produced by a different production method requiring a different paper machine than the one used for the production of CFP, as in the production process several layers of pulp are layered into a single product. Finally, multi-ply paper and paperboard serves different purposes (mainly packaging) compared to CFP that is used for high quality printing of promotional material, magazines, etc. Multi-ply paper and paperboard as defined in recital (47) is therefore considered as not being the product concerned. Consequently, the CN codes mentioned covering imports of multi-ply paper and multi-ply paperboard are excluded from the scope of the investigation.

76. Finally, one Chinese producer claimed that so called "paperboard" should be excluded from the scope of the investigation as it does not fall under the definition of fine paper (whether coated or not) because of alleged differences in its weight, thickness and rigidity. It was found that the term 'paperboard' is generally used for paper with high substances making the paper in general heavier, i.e. "paperboard" is commonly defined as paper with a basis weight of above 224 g/m2. However, the investigation revealed that the difference in weight does not have a significant impact on the remaining physical and technical characteristic and end uses which would it make distinguishable from the product concerned. It is also noted that, as outlined in recital (16), all CFP with a weight of 70 g/m2 or more but not exceeding 400 g/m2 were explicitly included in the definition of the product concerned. Therefore paperboard is considered as being the product concerned.

77. Like product

78. The product concerned, the product produced and sold on the domestic market of the PRC as well as the product manufactured and sold in the Union by the Union producers were found to have the same basic physical and technical characteristics as well as the same basic uses. They are therefore considered as alike within the meaning of Article 2(c) of the basic Regulation.

79. SAMPLING

80. Sampling for exporting producers in the PRC

81. Only two exporting producers groups in the PRC came forward and replied to the request for sampling data in the Notice of initiation. One group (Chenming) represents 2 related exporting producers while the other group (APP) represents 4 related exporting producers. The cooperating exporting producers represent the total exports of the product concerned from the PRC to the Union. In these circumstances, the Commission decided that sampling was not necessary for exporting producers in the PRC.

82. Two out of four related exporting producers of the APP group were found to produce only the multi-ply paperboard, mentioned in recital (47) above. In this respect it is recalled that it was concluded that multi-ply paperboard should be excluded from the product scope of the current investigation. It is also recalled that the multi-ply paperboard was excluded from the product scope of the parallel anti-dumping proceeding. It is therefore concluded that the two related exporting producers found to produce only multi-ply paperboard are not concerned by the current proceeding. Thus the hereunder presented findings are not based on their information and data.

83. Sampling of Union producers

84. In view of the potentially large number of Union producers sampling was envisaged in the Notice of initiation in accordance with Article 27 of the basic Regulation. However, after examination of the information submitted and given that only four Union producers came forward within the deadlines set in the Notice of initiation, it was decided that sampling was not necessary. The four above-mentioned producers were considered to be representative (covering 61% of total production) of the Union industry as defined in recital (372) below. The information provided by the four companies was verified on-spot and was used for the micro indicators as explained in recital (386).

85. Sampling of unrelated importers

86. In view of the potentially large number of importers, sampling was envisaged for importers in the Notice of initiation in accordance with Article 27 of the basic Regulation. However, after examination of the information submitted and given the low number of importers which indicated their willingness to co-operate, it was decided that sampling was not necessary.

87. SUBSIDISATION

88. Preliminary remarks

89. It is recalled that both the GOC and the four Chinese exporting producers submitted questionnaire replies and accepted on-spot visits in order to verify the replies.

90. With respect to the GOC, following the submission of the questionnaire reply, the Commission sent to the Chinese side three deficiency letters and a pre-verification letter. The Commission provided to the GOC ample time for the preparation and submission of its representations whenever this was requested and justified. Indeed substantial deadline extensions were granted to the GOC, i.e. two weeks extension for the reply to the questionnaire which led to a total deadline of 49 days for the submission of the questionnaire reply and three weeks for the reply to the first deficiency letter which led to a total deadline of 40 days.

91. Prior to the on-spot verification visit, the GOC requested the Commission to provide further information in writing, in particular a list of all the questions that it intended to ask during the verification plus a list of the Government departments which were expected to participate in the on-spot visit. In the absence of these, it was argued that the Commission would not fulfil its obligations as an investigating authority set out in the Agreement on Subsidies and Countervailing Measures ('SCM Agreement') and in particular those contained in paragraph 8 in Annex VI. The GOC also submitted that due to lack of such information it would not be in a position to guarantee the outcome of the verification.

92. The Commission respectfully disagreed with GOC's request. In this respect it is noted that the Commission has fulfilled all the relevant conditions of paragraph 8 in Annex VI of the SCM Agreement as well as of Article 26 of the basic Regulation. A detailed pre-verification letter was sent to the GOC confirming the agenda (days and group of schemes to be discussed per verification day) and requesting the presence of the authorities responsible for the relevant schemes and of the officials involved in the preparation of the GOC submissions. The Commission also explained before the on-spot verification visits that only the GOC knows the authorities responsible for the schemes under investigation as well as those officials whose are best placed to take part in the verification and answer questions. As regards the list of specific questions, the Commission explained before and during the on-spot verification visit that such a list is not required by WTO or EU legislation and that the purpose of this investigation is to verify the GOC reply to the questionnaire and the relevant supplementary submissions; therefore the verification would follow the structure of these documents. The Commission would also seek to obtain and clarify further information necessary for the ongoing proceeding but precise questions in this context would depend on the GOC's replies to the initial verification of its replies. It was also made clear to the GOC before the on-spot verification visit that refusals to provide necessary information or to assist the investigating authority in verifying information and data deemed necessary for the purposes of the proceeding may seriously undermine the investigation process. The GOC was also reminded of the consequences of the provisions of Article 28 of the basic Regulation.

93. During the on-spot verification visit to the Chinese Ministry of Commerce in Beijing, the Commission endeavoured to verify information provided on the basis of the supporting documents that were used to prepare the GOC's response, in line with the provisions of Articles 11 and 26 of the basic Regulation. In doing so, the Commission came preliminarily to the conclusion that the lack of information and supporting documents available does not allow a proper verification of the reply to the questionnaire. Moreover, certain information was not submitted at all although it was specifically requested and certain questions were simply not replied to. The GOC has been made aware of the consequences of non-cooperation in accordance with Article 28(1) and (6) of the basic Regulation.

94. The GOC argued that the investigating authority should determine the necessity of information in a reasonable manner that would not amount to abuse of rights. It was also argued that even if information is considered not ideal in all aspects it should not be disregarded. On the basis of the above arguments the GOC submitted that it cooperated to the best of its ability and that its questionnaire reply was complete. It was also argued that the on-spot verification was poorly scheduled as the pre-verification letter failed to provide a reasonable understanding of what was to be verified and the Commission did not conduct specific on-spot visits at each government entity. It was also submitted that the Commission imposed an unreasonable burden on the GOC and requested irrelevant and unnecessary information.

95. With respect to the scheduling of the on-spot verification, it is recalled that the GOC agreed to the timing, schedule of visit and venue. Indeed, discussions on the timing of the on-spot visit took place in August 2010. The Commission initially proposed the on-spot verification visit to take place on the first week of October 2010 and subsequently amended its proposal twice, on the basis of Chinese requests, first for the second week of October 2010 and finally for the third week of October 2010. Thus there is no basis to any complaints concerning scheduling of on-spot visits as the Commission did its utmost to accommodate any duly justified Chinese request. With respect to the requested information it is noted that the GOC has never disputed the format of the questionnaire or the way information was requested. The Chinese Ministry of Commerce submitted on behalf of the GOC its questionnaire reply and subsequent representations. The Commission requested information that is deemed necessary for the purposes of arriving at a representative finding and remained consistent in its requests by asking for the same data and information during the investigating process and requesting from the GOC to explain the submitted information and its implication to the investigated schemes.

96. Specific Schemes

97. On the basis of the information contained in the complaint and the replies to the Commission's questionnaire, the following schemes, which allegedly involved the granting of subsidies by the Governmental authority, were investigated:

(I) Preferential lending to the coated paper industry

(II) Income tax Programmes

- Preferential tax policies for companies that are recognised as high or new technology enterprises

- Preferential tax policies for Research & Development

- Dividend exemption between qualified resident enterprises

(III) Indirect Tax and Import Tariff Programmes

- VAT and Tariff exemption on imported equipment

- VAT rebates on domestically produced equipment

- City maintenance and Construction Taxes and education surcharges for Foreign Invested Enterprises

(IV) Grant Programmes

- Famous Brands

- Special Funds for Encouraging Foreign Investment Projects

- Anti-dumping Respondent Assistance

- Shouguang Technology Renovation Grant

- Suzhou Industrial park Intellectual Property Right Fund

- Subsidy of High-Tech Industrial Development Fund

- Award received from Suzhou Industrial Park for maintaining growth

- Special fund for water pollution treatment of Taihu lake of Jiangsu province

- Special funds for energy-saving of Suzhou Industrial Park

- Special fund for reduction of total emissions of major pollutants at municipal level of Suzhou municipality

- Subsidy for water-saving and emission reduction

- Environmental Protection award received from Suzhou Environmental Protection Bureau

- Energy saving award in Shouguang

(V) Government Provision of Goods and Services for Less than Adequate Remuneration (“LTAR”)

- Provision of land use rights

- Provision of paper-making chemicals

- Provision of electricity

- Preferential lending to the coated paper industry

(a) Introduction

98. It is alleged that Chinese producers of the product concerned benefit from low-interest rate loans from government policy banks and state-owned commercial banks (“SOCBs”) pursuant to the GOC’s policy to provide financial assistance in order to encourage and support the growth and development of the paper industry in China. As illustrated in the five-year plans and industrial policy, preferential financing initiatives have been granted by the banking system to the papermaking industry.

(b) Use of facts available

99. On the basis of the information contained in the complaint the Commission sought to investigate the bank lending to the coated paper industry. To this extent it was considered necessary to request from the GOC to provide in its questionnaire reply and subsequent submissions specific information and data on a series of government plans and projects to encourage and support the development of China's paper sector. These plans and projects were:

100. China Civilian Economy and Social Development 10th Five-Year Plan ('The 10th Five Year Plan')

101. The "10th Five year Plan" in the Papermaking Industry ('Papermaking Plan')

102. The 10th Five year and 2010 Special Plan for the Construction of a National Forestry and Papermaking Integration Project ('Integration Project')

103. Decision No. 40 of the State Council on Promulgating and Implementing the "Temporary Provisions on Promoting Industrial Structure Adjustment" ('Decision No. 40')

104. Directory Catalogue on Readjustment of Industrial Structure ('Directory Catalogue')

105. Guidelines for the Eleventh Five-Year Plan for National Economic and Social Development (2006-2010) ('11th Five-year Plan')

106. State Council Circular on Realizing the Major Targets in (The 11th Five Year-Year Plan) and the Division of Tasks ('11th five-year plan implementing circular')

107. 2007 Development Policy for the Papermaking Industry ('2007 Papermaking Plan')

108. The Guandong Development Plan

109. The Zhanjiang City 11th Five-Year plan

110. The 11th Five Year Plan of Jining Municipality

111. The GOC only partially provided the information requested in relation to plans. Only two of the plans requested were provided in full, i.e. in the Chinese version together with an English translation (Decision No. 40 and Directory Catalogue on Readjustment of Industrial Structure). For the three regional plans originally requested by the Commission, the Chinese authorities submitted that they are not relevant since the co-operating exporting producers are not located in these regions. They were thus not provided. The Commission accepted this but requested the development plans related to the areas (regions, provinces, municipalities) where the cooperating exporting producers are established. The GOC provided Chinese copies of the 11th Five year plan for Jiangsu Province and 11th Five year plan for Shandong Province, but no translation whatsoever, not even a translation of the table of contents. In relation to two plans that were not provided, the GOC submitted that they cover the period between 2000 and 2005 and are thus obsolete. The Commission accepted this. The remaining plans were provided only in Chinese (Integration Project, 11th Five-year Plan, 11th five-year plan implementing circular, 2007 Papermaking Plan) together with English tables of the contents. The GOC claimed that the Commission's requests were too burdensome, that they only had limited resources and therefore could not translate the texts.

112. With respect to the above it is noted that the Commission requested information that was deemed necessary for the investigation as the aforesaid documents have been identified in the complaint. Moreover the Commission had repeatedly emphasized the need to provide the requested documents in English. This is necessary for this type of significant document given that, on the basis of the index only, it was not possible to determine which part of the document is relevant for the investigation. Moreover, the plans provided in Chinese were not voluminous and it appears that copies in English of the relevant documentation exist either from independent sources (legal firms that specialize in Chinese law) or from anti-subsidy investigations conducted in China by the United States of America ('USA').

113. Consequently, the Commission had the possibility to verify only the following documents: the Decision No. 40, the Directory Catalogue and the 2007 Papermaking Plan, an English version of which was in the complaint and it was also made available from an exporting producer.

114. In order to investigate the level of government intervention in the Chinese financial market and obtain the necessary overview of the financial sector in the PRC, the Commission requested information on the percentage of government ownership of financial institutions and on the records of amounts/percentages of loans given by State owned banks. The GOC claimed that they did not have any records on the bank shareholding although Article 61 of the Law on Commercial Banks [2003] No. 13 provides that banks report these data " to the banking regulatory organ of the State Council and People's Bank of China ". As regards the amounts/percentages of loans given by State owned banks, the GOC confirmed that although relevant data is kept, it could not provide it. The Commission further facilitated the work of GOC by limiting the requested information on the percentage of government ownership only to such financial institutions that were found to provide loans to the co-operating exporting producers. Nevertheless, the GOC did not provide relevant data even for this restricted segment of financial institutions operating in China.

115. In order to investigate the lending policies of the Chinese banks (e.g. methods used as regards the setting of the interest loan rates, assessment of loans etc), the GOC was requested to provide information with respect to the policies followed by the relevant state authorities namely the People's Bank of China ('PBOC') and the Bank Regulatory Commission. The GOC did not provide any relevant information on the loan policies. No document, regulation or guidelines addressed to the banking system from the PBOC was provided in order to substantiate the role of the PBOC in setting interest rates and its relation with the banking system. Furthermore no explanation was given, although specifically requested, with respect to the application of the Law on Commercial Banks [2003] No. 13 and particularly Articles 34, 38 and 39 that set out the basic rules governing loans and other businesses of commercial banks.

116. In order to investigate the lending policies of the Chinese banks that provided loans during the IP to the cooperating exporting producers, the Commission requested the GOC to arrange meetings with specific banks that have provided loans to the cooperating exporting producers in order to verify information concerning preferential lending to the CFP industry in China. The GOC claimed that it was unable to intervene with State-owned banks to arrange such meetings. Therefore, no evidence has been collected from Chinese banks as to whether and, if so, how those banks evaluate credit risk when providing loans.

117. The GOC was made aware of the consequences of non-cooperation in accordance with Article 28(1) and (6) of the basic Regulation. In view of this lack of cooperation, it has been necessary, in addition to taking account of relevant GOC documents submitted by other parties, to use information from secondary sources, including the complaint and publicly available information retrieved from internet. The GOC disputed the use of facts available but did not provide any further new evidence.

118. The cooperating exporting producers were also requested to arrange meetings with specific banks that have provided loans to them during the IP in order to verify information concerning preferential lending to the CFP industry in China. However, no such meetings took place. The cooperating exporting producers communicated the repeated requests of the Commission for such meetings but the relevant banks refused to cooperate with the investigation. The co-operating exporting producers were made aware of the consequences of non-cooperation in accordance with Article 28(1) and (6) of the basic Regulation. In view of this lack of cooperation, it is considered necessary to base any findings with respect to the loans provided by banks to the co-operating exporting producers on facts available. The co-operating exporting producers disputed the use of facts available but did not provide any further evidence.

119. One Chinese exporting producer was requested to provide specific information concerning a specific debt restructuring agreement with three Chinese banks. The aforesaid exporting producer refused to provide the necessary information. Consequently, it was not possible to verify the relevant overall agreement and corresponding contract loans as well as all specific points like duration of loans, repayment schedules and interest rates. The co-operating exporting producer was made aware of the consequences of non-cooperation in accordance with Article 28(1) and (6) of the basic Regulation. In view of this lack of cooperation, it is considered necessary to base any findings with respect to the relevant loans provided by banks to the co-operating exporting producer on facts available. The co-operating exporting producer disputed the use of facts available but did not provide any further evidence.

(c) Findings of the investigation

(i) Government intervention in the financial banking system for a preferential lending to paper making industry

- Role of government plans

120. The investigation established the existence of specific policy plans with respect to the papermaking industry. These plans stipulate that the state authorities monitor closely the performance of the papermaking industry and implement special policies (e.g. implementing decrees) for the fulfilment of the goals of the policy plans. Furthermore, the investigation also established that the specific policy plans provide for preferential lending to the paper making industry.

121. Indeed, by examining the Decision No 40 and the specific financing section of the 2007 Papermaking Plan it is obvious that the Chinese state planning system directs banks to provide loans to the paper making industry.

122. With reference to the Decision No 40, it is noted that this Act is an order from the State Council i.e. the highest administrative body in the PRC and so legally binding for other public bodies and the economic operators. The Decision classifies the industrial sectors into 'Encouraged, Restrictive and Eliminated Projects'. This Act represents an industrial policy guideline that along with the Directory Catalogue shows how the GOC maintains a policy to encourage and support groups of enterprises or industries, such as the paper industry, classified by the Directory Catalogue as an 'Encouraged industry'. With respect to the number of industries listed as 'Encouraged' it is noted that there are in total 26, representing only a portion of the Chinese economy. Furthermore, only certain activities within these 26 sectors are given "encouraged" status. The Decision No 40 also stipulates under Article 17 that the 'Encouraged investment projects' shall benefit from specific privileges and incentives (financial support, import duty exemption, VAT exemption, tax exemption). On the other hand, with reference to the 'Restrictive and Eliminated Projects', the Decision No 40 empowers the state authorities to intervene directly to regulate the market. In fact, Articles 18 and 19 request the relevant authority to stop financial institutions from supplying loans; they also order the State price administrative department to raise the electricity price and instruct the electricity supply companies to stop supplying electricity to such 'Restrictive and Eliminated Projects'. It is obvious from the above that Decision No 40 provides binding rules to all the economic institutions in the form of directives on the promotion and support of encouraged industries, one of which is the paper making industry.

123. With respect to the 2007 Papermaking Plan it is noted that it provides specific conditions, orientations and targets for the papermaking industry. It describes the state of the papermaking industry in China (e.g. number of enterprises, production, consumption and exports, statistics on the type of raw materials used). It sets out the policies and goals for the papermaking industry with respect to the industrial layout, the use of raw materials, the use of technology and equipment, the product structure and the organizational structure of the papermaking producers. The text also sets industry "admission criteria", as it lays down specific assets/liability ratio requirements for the papermaking industry, sets specific credit ratings for the papermaking industry and specific targets for economies of scale, market share ratios, energy and water consumption to be achieved or attained by companies. It requests enterprises to formulate development plans based on the 2007 Papermaking Plan. It also instructs the local provinces and regions to participate in the implementation of the plan, while an entire chapter is devoted to "Investment and Financing" of the papermaking industry. In this respect it is pertinent to note that the Plan clearly states that financial institutions shall not provide loans for any project which does not comply with its regulations. In sum it is clear from the reading of the text and the wording used that the 2007 Papermaking Plan is a specific state instrument aimed at regulating the papermaking industry in China and can only be considered as a compulsory industrial policy tool that has to be concretely implemented by relevant interested parties in China (state authorities, financial institutions and producers).

124. The GOC argued that the 2007 Papermaking Plan is to be considered a guideline plan without binding force. It was also submitted that in the same context none of the government plans and projects are legally binding and as a result no financial contribution or benefit can be granted in the framework of such plans and projects. However, a simple reading of the text on the 2007 Papermaking Plan and its above-stated specific provisions reveals that the text cannot be considered as a non-binding guideline. In this respect it is noted that the 2007 Papermaking Plan text inter alia reads " The industrial development policy is formulated based on the requirements of perfecting the reform of the socialist market economy and the related laws and regulations, so as to establish a fair market order and good development environment, solve the issues existing in the development of papermaking industry and direct the healthy development of the industry " With respect to the remaining plans and projects as listed under recital (64) above it is noted that at least one refers to an implementing circular of the 11th Five Year Plan. It is difficult to understand how an allegedly non-legally binding document (a government plan) can have a legally binding implementing act (in this case a circular of the State Council).

125. In addition, Article 34 of the Law on Commercial Banks [2003] No. 13 states that banks ' carry out their loan business upon the needs of the national economy and the social development and under the guidance of the state industrial policy '. In this particular case the relevant state industrial policy is the 2007 Papermaking Plan. Thus, it only logical to conclude that loans received by the CFP producers from SOCBs are made pursuant to government directives.

126. The role of the National Development and Reform Commission ('NDRC') was also investigated. It was submitted by the GOC that the NDRC is an agency of the State Council coordinating macro-economic policy and managing the Government investments. This state authority issued among other plans the 2007 Papermaking Plan. No available information was submitted, although explicitly requested, on the legal framework under which the NDRC was established and operates, e.g. its statute. The only explanation provided by the GOC was that the State Council, the highest governmental administrative body, gives the instructions which the NDRC has to follow and that in any event this information is irrelevant to the investigation. This argument cannot be accepted. The statutes of the authority that issues government plans is considered relevant to the investigation, in view of the fact that government plans and projects are investigated in this proceeding. The Commission also enquired about the reasons why the NDRC collects, on a permanent basis, detailed information from companies. The GOC clarified that the information could be collected through industrial associations and other public sources. Nevertheless, the existence of a systematic mechanism to collect company related data to be used in government plans and projects reveals that these plans and project are considered as an important element of state industrial policy.

127. It follows from the above that any decision taken by financial institutions with respect to the papermaking industry would have to take into consideration the need to fulfil the goals of the relevant policy plans. Indeed, companies qualified by these specific policy plans as 'Encouraged industries' are considered of high credit rating, something that has direct consequences on the assessment of the creditworthiness by the Chinese financial system. Furthermore, from examining the specific financing section of the 2007 Papermaking Plan and a credit rating note that was made available from one co-operating exporting producer it is obvious that the Chinese state planning system directs banks to provide loans to the papermaking industry and companies are considered of high credit rating because they qualify for specific policy plans. It is pertinent to note that the particular credit rating note obtained during the investigation directly links the positive future prospects of the company with the existence of the papermaking policy plans and the fulfilment of their objectives. There is also evidence that the State authorities monitor the performance of companies as they examine annually their business licenses and retain in this way financial and performance statistics. Furthermore, there is also evidence, derived from information submitted from co-operating exporting producers, that the PBOC monitors, in line with the provisions of Article 9 of the Regulation on Registration and Consultation of Banks, the loan situation of companies through the annual examination of the loans companies avail themselves of each year.

128. All the above facts demonstrate the link between the specific policy plans and the financing of the papermaking industry.

- Government intervention in the banking sector

129. With respect to the co-operating exporting producers the investigation established that two of them were, in the majority of cases, automatically granted the lowest possible interest rate within the limits set out by the PBOC while other two co-operating exporting producers benefited from a substantial rescheduling of their loans that took place in 2008. Indeed, Chinese state-owned banks purchased all loans due to foreign banks and the rescheduled loans did not provide for a significant risk premium over the PBOC interest rate benchmark.

130. In addition, the investigation has established that the Chinese financial market is characterised by government intervention because most of the major banks are state-owned. The Chinese authorities have only provided some very limited information concerning shareholding/ownership of banks in China. However, as further outlined below, the Commission compiled available information in order to arrive at a representative finding. In performing its analysis whether banks are entities vested with or exercising government authority the Commission also sought information concerning not only the government ownership of the banks but also other characteristics such as the government presence on the board of directors, the government control over activities, the pursuit of government policies or interests and whether entities were created by statute.

131. From the available information it is concluded that the state-owned banks in China command the highest market share and are the predominant players in the Chinese financial market; according to the 2006 Deutsche Bank Research on China's banking sector, the state-owned banks' share may amount to more than 2/3 of the Chinese market. For the same matter the WTO Trade Policy Review of China noted that “ The high degree of state ownership is another notable feature of the financial sector in China ”[5]. It is pertinent to note that the four big state-owned banks (Agricultural Bank, Bank of China, Construction Bank and Industrial and Commercial Bank) appear to represent more than half of the Chinese banking sector. Policy banks and other state-owned banks are more than 50% state-owned. The Commission also requested information concerning the structure of government control in the aforesaid Chinese banks and the pursuit of government policies or interests with respect to the Papermaking industry (i.e. board of directors and board of shareholders, minutes of shareholders/directors meetings, nationality of shareholders/directors, lending policies and assessment of risk with respect to loans provided to the cooperating exporting producers). Nevertheless, the GOC or the banks did not provide such information. They only repeatedly referred to information in the Annual reports of the banks they had submitted. However, the information in the Annual reports of banks did not (and cannot) contain the required level of detailed information. Consequently, the Commission had to use the information available. It concluded on the basis of the available data that the aforesaid banks are controlled by the government and exercise government authority in a manner that their actions can be attributed to the State. The relevant data used in order to arrive at the aforesaid findings is derived from information submitted by the GOC, the annual reports of Chinese banks that were either submitted from GOC or publicly available, information retrieved from the 2006 Deutsche Bank Research on China's banking sector, information submitted from the co-operating exporting producers and information existing in the complaint. As for foreign banks, independent sources estimate that they represent a minor part of the Chinese banking sector so to play an insignificant role in the policy lending with relevant information suggesting that this may be as low as 1% of the Chinese market[6]. Relevant public available information also confirms that Chinese banks, particularly the large commercial banks, still rely on state-owned shareholders and the government for replenishment of capital when there is a lack of capital adequacy as result of credit expansion[7]. With respect to the banks that provided loans to the co-operating exporting producers, the great majority are state-owned banks. Indeed on the basis of the available information it was found that at least 13 out of the 19 reported banks are state-owned banks, including two Policy banks (Export-Import Bank of China, the China Development Bank) and the major Commercial banks in China like Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China. With respect to the remaining state-owned banks, again the Commission requested the same information mentioned above concerning the government control and the pursuit of government policies or interests with respect to the Papermaking industry. Again, no such detailed information was provided apart from a repeated claim to refer to information in the relevant Annual reports of the banks which in the majority of cases was only in Chinese and without any English translation. However, information in the Annual reports of banks cannot provide the required level of detailed information. With respect to the Policy banks, as explained hereunder the investigation established that there are no clear legal provisions regulating their role and their relationship with the government. But it is also pertinent to note that according to statements made by the GOC during the on-spot verification it appears that Policy banks supported government policies in China and are not operating for profit. All the above points confirm that the aforesaid banks are controlled by the government and exercise government authority in a manner that their actions can be attributed to the State.

132. The Commission also sought to investigate the difference between the Policy banks (according to available information these are the Export-Import Bank of China, the China Development Bank and the Agricultural Development Bank of China) and State Owned Commercial banks. The Commission requested clarifications on these two different types of financial institutions. The GOC submitted that the Policy banks do not have any written legal provisions regulating their sector, given that the Chinese authorities are currently drafting a law on Policy banks. It was also argued that one Policy bank (namely the China Development Bank) should not be considered as such since it has become a shareholding company and is in a transitional period. In relation to the above it is noted that information submitted confirms that policy banks are treated differently. Although there lack of any rules governing the Policy banks sector and the way these banks act in the Chinese financial market it appears from the PBOC circulars mentioned hereunder, where they are mentioned explicitly, that they have a special status as compared to the remaining banks. As to the status of the China Development Bank it is noted that the Chinese state (through the Chinese Ministry of Finance) holds more than 50% of the bank's shares and thus its transformation into a share-holding company does not have any impact on the government control.

133. Another factor that creates a distortion on the Chinese financial market is the role played by the PBOC in setting the specific limits on the way interest rates are set and fluctuate. Indeed, the investigation established that the PBOC has specific rules regulating the way interest rates float in China. According to the available information these rules are set out in the PBOC's Circular on the Issues about the Adjusting Interest Rates on Deposits and Loans-Yinfa (2004) No 251. Financial institutions are requested to provide loan rates within a certain range of the benchmark loan interest rate of the PBOC. For commercial bank loans and policy bank loans managed commercially there is no upper limit range but only a lower limit range. For urban credit cooperatives and rural credit cooperatives there are both upper and lower limit ranges. For preferential loans and loans for which the State Council has specific regulations the interest rates do not float upwards. The Commission sought clarifications from the GOC on the definition and wording stated in the aforesaid circular as well as to its preceding legislation (Circular of PBOC concerning expansion of Financial Institution's Loan Interest Rate Float Range – YinFa [2003] No. 250). The GOC explained that the above Circulars formed part of the marketization reform of interest rates in China but gave no further explanation. The GOC was also requested to explain what are the preferential loans and other loans specified by State Council. GOC argued that the wording of the relevant Chinese text refers to an assumption of other loans specified by the State Council. No other explanation or relevant documentation was provided by the GOC to explain why preferential loans are defined in the Chinese legislation. As to the other type of loans, even if one accepts the argument of the GOC, it is unclear why the legislator felt it necessary to introduce the possibility of other loans set out by the State Council. The Commission also requested clarifications on the existence of policy loans managed commercially, as mentioned in the aforesaid Circular. No explanation or any evidence was provided by the GOC on this matter. The GOC was also requested to provide any updates or subsequent legislation issued on the aforesaid Circular in relation to the loan policy of commercial and policy banks but no such information was provided.

134. Finally it is noted that no other data or statistics concerning the structure of the Chinese banking system was provided by the GOC.

135. On the basis of all the above (see recitals (74) to (88) above) and account taken of the lack of Chinese cooperation (and in the light of the considerations in recital (90) below), the Commission concludes that , the financing market in China is distorted by government intervention and interest rates charged by non-government banks and other financial institutions are likely to be aligned with government rates. Therefore, the interest rates charged by non-governmental banks and other financial institutions cannot be considered as appropriate commercial benchmarks when determining whether government loans confer a benefit.

(ii) Financial Contribution

136. Furthermore, having regard to the totality of the evidence, it is concluded that the vast majority of loans to the two co-operating producers are provided by policy or other state-owned banks which are considered to be public bodies because of their close relationship to the government. They are more than 50% state-owned and are thus considered controlled by the government. There is further evidence that these banks effectively exercise government authority since as it is explained in recital (65) there is a clear intervention by the State (i.e. PBOC) in the way commercial banks take decisions on interest rates for loans granted to Chinese companies while in some cases as explained in recital (83) companies were attributed quasi automatically the lowest possible rate within the limits set by the State. In these circumstances, the lending practices of these entities are directly attributable to the government. The fact that banks exercise government authority is also confirmed by the way the 2007 Papermaking Plan, Decision 40 and Article 34 of the Law on Commercial Banks act with respect to the fulfilment of the government industrial policies (see recitals (74) to (81) above). There is also a great deal of circumstantial evidence, supported by objective studies and reports, that a large amount of government intervention is still present in the Chinese financial system (see recital (312) below). Finally, China failed to provide information which would have enabled a greater understanding of the state-owned banks' relationship with government (see recitals (68) to (70) and recital (84) to (86) above) Thus, in the case of loans provided by policy or other state-owned banks, the Commission concludes that there is a financial contribution to the coated paper producers in the form of a direct transfer of funds from the government within the meaning of Article 3(1)(a)(i) of the basic Regulation.

(iii) Benefit

137. There is a benefit according to Articles 3(2) and 6(b) of the basic Regulation to the extent that the government loans are granted on terms more favourable than the recipient could actually obtain on the market. Since it has been established that non-government loans in China do not provide an appropriate market benchmark, this has been constructed using the method described in recitals (96) to (102) below.

(iv) Specificity

138. The GOC was requested to provide information on the eligibility criteria for obtaining this subsidy and on the use of the subsidy, in order to determine to what extent access to the subsidy is limited to certain enterprises and whether it is specific according to Article 4 of the basic Regulation. The GOC provided no such information. The Commission, mindful of the requirement of Article 4(5) of the basic Regulation that any determination of specificity shall be "clearly substantiated" on the basis of positive evidence, therefore had to base its findings on the facts available in accordance with Article 28 of the basic Regulation. It is noted that Article 28(6) states that " If an interested party does not cooperate, or cooperates only partially, so that relevant information is thereby withheld, the result may be less favourable to the party than if it had co-operated". The facts considered included the following:

139. The evidence of specificity submitted by the complainant.

140. The findings (see recitals (77) and (78)) that specific subsidies are channelled to the papermaking industry through a specific sectoral plan i.e. the Papermaking Plan.

141. The evidence (see recital (76)) that the papermaking industry is an "encouraged industry" (Decision No 40).

142. The provisions of Article 34 of the Law on Commercial Banks [2003] No. 13 (see recital (79)) stipulating that commercial banks shall carry out their loan business upon the needs of the national economy and the social development and in the spirit of the state industrial policies i.e. in this particular case in the spirit of the Papermaking Plan.

143. The findings (see recital (81)) that the Chinese state planning system directs banks to provide loans to the papermaking industry and companies are considered of high credit rating because they qualify for specific policy plans.

144. In the light of the above, and in the absence of any cooperation by the GOC, the available evidence indicates that subsidies granted to companies in the paper industry are not generally available and are therefore specific under Article 4(2)(a) of the basic Regulation. In the light of the GOC's non-cooperation, there is nothing to suggest that eligibility for the subsidy is based on objective criteria or conditions under Article 4(2)(b) of the basic Regulation.

(d) Conclusion

145. Account taken of the above, the financing of the papermaking industry has to be considered a subsidy.

146. In view of the existence of a financial contribution, a benefit to the exporting producers and specificity, this subsidy is considered countervailable.

(e) Calculation of the subsidy amount

147. The amount of countervailable subsidy is calculated in terms of the benefit conferred on the recipients, which is found to exist during the IP. According to Article 6(b) of the basic Regulation, the benefit conferred on the recipients is considered to be the difference between the amount that the company pays on the government loan and the amount that the company would pay for a comparable commercial loan obtainable on the market.

148. As explained above, since the loans provided by Chinese banks reflect substantial government intervention in the banking sector and do not reflect rates that would be found in a functioning market, an appropriate market benchmark has been constructed using the method described below. Furthermore, due to the lack of cooperation by the GOC, the Commission has also resorted to facts available in order to establish an appropriate benchmark interest rate.

149. When constructing an appropriate benchmark, it is considered reasonable to apply Chinese interest rates, adjusted to reflect normal market risk. Indeed, in a context where the exporters' current financial state has been established in a distorted market and there is no reliable information from the Chinese banks on the measurement of risk and the establishment of credit ratings, it is considered necessary not to take the creditworthiness of the Chinese exporters at its face value, but to apply a mark-up to reflect the potential impact of the Chinese distorted market on their financial situation.

150. With respect to the above as explained in recitals (68) to (72) both GOC and the cooperating exporting producers were requested to provide information on the lending policies of the Chinese banks and the way loans were attributed to the exporting producers. Parties failed to provide such information although repeatedly requested to do so. Accordingly in view of this lack of cooperation and the totality of facts available, and in line with the provisions of Article 28(6) of the basic Regulation, it is deemed appropriate to consider that all firms in China would be accorded the highest grade of "Non-investment grade" bonds only (BB at Bloomberg) and apply the appropriate premium expected on bonds issued by firms with this rating to the standard lending rate of the People's Bank of China. For loans received in foreign currency, the Commission applies the appropriate premium expected on bonds issued by firms with this rating to the standard lending rate as mentioned in the relevant Chinese loan contracts (LIBOR rate). However, given the total non-cooperation of the GOC as regards providing information on, or access to, state-owned banks, it is considered appropriate, in accordance with Article 28(6) if the basic Regulation, to use a credit rating of BB (non-investment grade-speculative), in view of the totality of the facts available.

151. The benefit to the exporting producers has been calculated by taking into consideration the interest rate differential, expressed as a percentage, multiplied by the outstanding amount of the loan, i.e. the interest not paid during the IP. This amount was then allocated over the total turnover of the co-operating exporting producers.

152. As explained in recital (73), one exporting producer refused to provide an important debt restructuring agreement. As a consequence it was not possible to verify basic information reported in relation to the loans falling under this agreement, such as interest rate, maturity of the loan, repayment schedule etc. The exporting producer could also not prove that it repaid the principals of the loans falling under this agreement. Therefore in the calculation of benefit these loans were considered as a grant and were allocated over the IP in addition to the interest not paid during the IP as explained in recital (100) above.

153. The subsidy rate established with regard to this scheme during the IP amounts to 5.37% for APP companies and 1.26% for Chenming companies.

154. Income tax Programmes

- Preferential tax policies for companies that are recognised as high and new technology enterprises

155. This scheme allows a company that applies successfully for the Certificate of High and New Tech Enterprise to benefit from a reduced income tax rate of 15%, compared to the normal rate of 25%.

(a) Legal Basis

156. The scheme is provided as a preferential tax treatment by Article 28 of the Enterprise Income Tax Law of the PRC (n. 63 promulgated on 16 March 2007) along with Administrative Measures for the determination of High and New Tech Enterprises. The Notice of the State Administration of Taxation on the Issues concerning Enterprise Income Tax Payment of High & New Technology Enterprises (Guo Shui Han [2008] No.985) also relates to this scheme, providing further details on its implementation.

(b) Eligibility

157. Article 10 of Administrative Measures for the determination of High and New Tech Enterprises lists the eligibility criteria for the companies to benefit from this scheme. If the company fulfils all the conditions set out in Article 10, it has to submit an application to the relevant authorities according to the procedure in Article 11 of the same Act.

(c) Practical implementation

158. Any company that intends to apply for this scheme has to proceed to an on-line application to the local Science and Technology Bureau that will make a preliminary examination. Subsequently, the local Science and Technology Bureau will make a recommendation to the provincial Science and Technology department. Before taking any decision on the issuance of the certificate of High and New Tech Enterprise, the latter can also decide to carry out an investigation directly at the premises of the applicant.

(d) Findings of the investigation

159. This scheme was used by the 3 cooperating exporting producers who obtained benefits during the IP. Although no administrative rules were provided by the GOC, the exporting producers provided the available legal texts. Even from these texts, however, it is difficult to discern the application procedure which remains vague and non-transparent.

(e) Conclusion

160. Account taken of the above, the scheme is considered a subsidy within the meaning of Article 3(1)(a)(ii) and Article 3(2) of the basic Regulation in the form of foregone government revenue which confers a benefit upon the recipient companies.

161. The GOC was requested to provide information on the eligibility criteria for obtaining this subsidy and on the use of the subsidy, in order to determine to what extent access to the subsidy is limited to certain enterprises and whether it is specific according to Article 4 of the basic Regulation. The GOC provided no such information. The Commission, mindful of the requirement of Article 4(5) of the basic Regulation that any determination of specificity shall be "clearly substantiated" on the basis of positive evidence, therefore had to base its findings on the facts available, as stated under Section 4.1, in accordance with Article 28 of the basic Regulation.

162. This subsidy scheme is specific within the meaning of Article 4(2)(a) of the basic Regulation given that the legislation itself, pursuant to which the granting authority operates, limited the access to this scheme only to certain enterprises and industries classified as encouraged, such as those belonging to the coated paper industry. Indeed, in chapter 4 of the Enterprise Income Tax Law of the PRC (No. 63 promulgated on 16 March 2007) devoted to "Tax Incentive", Article 25 provides that " the State grants enterprise income tax incentives to key industries and projects supported and encouraged by the State ". According to the Commission's understanding, the State Council in its Decision 40 (Article 14) and in the Guiding Catalogue of the Industrial Restructuring offers the principles and the classification to consider an enterprise as encouraged. In addition, there are no objective criteria to determine eligibility and no conclusive evidence to conclude that the eligibility is automatic in accordance with Article 4(2)(b) of the basic Regulation. Indeed, although some administrative rules have been collected during the visit to the exporting producers, the lack of cooperation from the GOC authorities do not permit to assess the existence of such objective criteria.

163. Account taken of the above, this subsidy is considered countervailable.

(f) Calculation of the subsidy amount

164. The amount of countervailable subsidy is calculated in terms of the benefit conferred on the recipients which is found to exist during the IP. The benefit conferred on the recipients is considered to be the amount of total tax payable according to the normal tax rate, after the deduction of what was paid with the reduced preferential tax rate. In accordance with Article 7(2) of the basic Regulation this subsidy amount (numerator) has been allocated over the total sales turnover of the cooperating exporting producers during the IP, because the subsidy is not contingent upon export performance and was not granted by reference to the quantities manufactured, produced, exported or transported.

165. The subsidy rate established with regard to this scheme during the IP for the cooperating exporting producers amounts to 1.22% for the APP Group and 0.58% for the Chenming Group.

- Preferential tax policies for Research & Development (R&D)

166. This scheme provides a benefit to all companies that are recognized as carrying out R&D projects. This qualification permits that the corporate income tax is decreased by 50% of the actual expenses for approved projects.

(a) Legal Basis

167. The scheme is provided as a preferential tax treatment by Article 30(1) of the Enterprise Income Tax Law of the PRC (n. 63 promulgated on 16 March 2007), Art. 95 of the Regulations on the Implementation of Enterprise Income Tax Law of the PRC, Decree n. 512 of the State Council of the PRC, promulgated in date on 6 December 2007 and the Guide to Key Fields (Notification n. 6, 2007).

(b) Eligibility

168. This scheme provides a benefit to companies that are recognized as carrying out R&D projects. Only R&D projects of the companies of New and High Tech Sectors Receiving Primary Support from the State and projects listed in the Guide to Key Fields of High Tech Industrialization under the current Development Priority promulgated by the National Development and Reform Commission are eligible for the scheme.

(c) Practical implementation

169. Any company that intends to apply for this scheme needs to file detailed information about the R&D projects with the local Science and Technology Bureau. After examination, the tax bureau will issue the notice of approval. The amount subject to the corporate income tax is decreased by 50% of actual expenses for approved projects.

(d) Findings of the investigation

170. This scheme was used by the cooperating exporting producers who obtained benefits during the IP. Although no administrative rules were provided by the GOC, the exporting producers provided the available legal texts. Even from these texts, however, it is difficult to discern the application procedure - which remains vague and non-transparent.

(e) Conclusion

171. Account taken of the above, the scheme has to be considered a subsidy within the meaning of Article 3(1)(a)(ii) and Article 3(2) of the basic Regulation in the form of foregone government revenue which confers a benefit upon the recipient companies.

172. The GOC was requested to provide information on the eligibility criteria for obtaining this subsidy and on the use of the subsidy, in order to determine to what extent access to the subsidy is limited to certain enterprises and whether it is specific according to Article 4 of the basic Regulation. The GOC provided no such information. The Commission, mindful of the requirement of Article 4(5) of the basic Regulation that any determination of specificity shall be "clearly substantiated" on the basis of positive evidence, therefore had to base its findings on the facts available, as stated under Section 4.1, in accordance with Article 28 of the basic Regulation.

173. This subsidy scheme is specific within the meaning of Article 4(2)(a) of the basic Regulation given that the legislation itself, pursuant to which the granting authority operates, limited the access to this scheme only to certain enterprises and industries classified as encouraged, such as those belonging to the coated paper industry. In addition, there are no objective criteria to limit eligibility and no conclusive evidence to conclude that the eligibility is automatic in accordance with Article 4(2)(b) of the basic Regulation. Indeed, although some administrative rules have been collected during the visit to the exporting producers, the lack of cooperation from the GOC authorities does not permit to assess the existence of such objective criteria.

174. Account taken of the above, this subsidy is considered countervailable.

(f) Calculation of the subsidy amount

175. The amount of countervailable subsidy is calculated in terms of the benefit conferred on the recipients, which is found to exist during the IP. The benefit conferred on the recipients is considered to be the amount of total tax payable according to the normal tax rate, after the subtraction of what was paid with the additional 50% deduction of the actual expenses on R&D for the approved projects. In accordance with Article 7(2) of the basic Regulation this subsidy amount (numerator) has been allocated over the total sales turnover of the cooperating exporting producers during the IP, because the subsidy is not contingent upon export performance and was not granted by reference to the quantities manufactured, produced, exported or transported.

176. The subsidy rate established with regard to this scheme during the IP for the cooperating exporting producers amounts to 0.02% for the APP Group and 0.05% for the Chenming Group.

- Dividend exemption between qualified resident enterprises

177. The scheme concerns resident enterprises in China which are shareholders in other resident enterprises in China. The former are entitled to a tax exemption on income from certain dividends paid by the latter.

(a) Legal Basis

178. This scheme is provided as a preferential tax treatment by Article 26 of the Enterprise Income Tax Law of the PRC and further explained in Article 83 of the Regulations on the Implementation of Enterprise Income Tax Law of the PRC, Decree n. 512 of the State Council of the PRC, promulgated in date on 6 December 2007.

(b) Eligibility

179. This scheme provides a benefit to all resident companies which are shareholders in other resident enterprises in China.

(c) Practical implementation

180. The companies may make use of this scheme directly through their tax return.

(d) Findings of the investigation

181. On the income tax statement of the cooperating exporting producers there is an amount exempted from income tax. This amount is referred to as Dividends, bonuses and other equity investment income of eligible residents and enterprises in line with the conditions in Appendix 5 to the Income tax return (Annual Statement of Tax Preferences). No income tax was paid by the relevant companies on these amounts.

(e) Conclusion

182. Account taken of the above, the scheme has to be considered a subsidy within the meaning of Article 3(1)(a)(ii) and Article 3(2) of the basic Regulation in the form of foregone government revenue which confers a benefit upon the recipient companies.

183. The GOC was requested to provide information on the eligibility criteria for obtaining this subsidy and on the use of the subsidy, in order to determine to what extent access to the subsidy is limited to certain enterprises and whether it is specific according to Article 4 of the basic Regulation. The GOC provided no such information. The Commission, mindful of the requirement of Article 4(5) of the basic Regulation that any determination of specificity shall be "clearly substantiated" on the basis of positive evidence, therefore had to base its findings on the facts available, as stated under Section 4.1, in accordance with Article 28 of the basic Regulation.

184. This subsidy scheme is specific within the meaning of the Article 4(2)(a) of the basic Regulation given that the legislation itself, pursuant to which the granting authority operates, limited the access to this scheme only to resident enterprises in China receiving dividend income from other resident enterprises in China, as opposed to those enterprises which invest in foreign enterprises.

185. In addition, since all the above tax schemes under Chapter 4 of the Enterprise Income Tax Law of the PRC are reserved exclusively to important industries and projects supported or encouraged by the State as stated in Article 25, also this scheme is specific because it is reserved only to certain enterprises and industries classified as encouraged, such as the coated paper industry. Indeed, according to the Commission's understanding, the State Council in its Decision No. 40 (Article 14) and in the Guiding Catalogue of the Industrial Restructuring offers the principles and the classification to consider an enterprise as encouraged. Furthermore, in that case there are no objective criteria to limit eligibility and no conclusive evidence to conclude that the eligibility is automatic in accordance with Article 4(2)(b) of the basic Regulation. Indeed, although some administrative rules have been collected during the visit to the exporting producers, the lack of cooperation from the GOC authorities does not permit to assess the existence of such objective criteria.

186. Account taken of the above, this subsidy is considered countervailable.

(f) Calculation of the subsidy amount

187. The amount of countervailable subsidy is calculated in terms of the benefit conferred on the recipients, which is found to exist during the IP. The benefit conferred on the recipients is considered to be the amount of total tax payable with the inclusion of the dividend income coming from other resident enterprises in China, after the subtraction of what was actually paid with the dividend tax exemption. In accordance with Article 7(2) of the basic Regulation this subsidy amount (numerator) has been allocated over the total sales turnover of the co-operating exporting producers companies during the IP, because the subsidy is not contingent upon export performance and was not granted by reference to the quantities manufactured, produced, exported or transported.

188. The subsidy rate established with regard to this scheme during the IP for the cooperating exporting producers amounts to 1.34% for the APP Group and 0.21% for the Chenming Group.

189. Indirect Tax and Import Tariff Programmes

- VAT and Tariff exemption on imported equipment

190. This scheme provides benefits in the form of VAT exemption and duty free imports of capital goods to the FIEs or domestic companies which are able to obtain the Certificate of State-Encouraged projects issued by the Chinese authorities in line with relevant investment, tax and customs-related legislation.

(a) Legal Basis

191. The scheme is based on a set of legal provisions i.e. the Circular of the State Council on Adjusting Tax Policies on Imported Equipment No. 37/1997, the Announcement of the Ministry of Finance, the General Administration of Customs and the State Administration of Taxation [2008] No. 43, the Notice of the NDRC on the relevant issues concerning the Handling of Confirmation letter on Domestic or Foreign-funded Projects encouraged to develop by the State, No. 316 2006, dated 22 February 2006 and on the Catalogue on non-duty-exemptible Articles of importation for either FIEs or domestic enterprises-2008.

(b) Eligibility

192. Eligibility is limited to applicants, either FIEs or domestic enterprises, which are able to obtain the Certificate of State-Encouraged projects.

(c) Practical implementation

193. According to the Notice of the NDRC on the relevant issues concerning the Handling of Confirmation letter on Domestic or Foreign-funded Projects encouraged to develop by the State, No. 316 2006, dated 22 February 2006, Article I.1. the foreign investment projects complying " with those of the encouraged category in the Catalogue of industries for Guiding Foreign Investment and the Catalogue of Priority Industries for Foreign Investment in Central-Western Region with technology transfer, the tariff and the VAT shall be exempted on the self-use equipment imported within the total investment and the technology, parts and components, and spare parts imported along with the equipment according to the contract; excluded are those commodities that are listed in the Catalogue of Import Commodities under Foreign Investment Projects not exempted from tax ". The Projects Confirmation Letter for foreign investment projects of the encouragement category with the total investment of USD 30 million or more shall be issued by the NDRC. The Project Confirmation Letter for foreign investment projects of the encouragement category with the total investment of less than USD 30 million shall be issued by the commissions or economic municipalities at the provincial level. Once they have received the Project Confirmation Letter of the encouragement category, the companies present the certificates and other application documents to their local Customs authorities in order to be eligible for customs and VAT exemption on equipment imports.

(d) Findings of the investigation

194. All co-operating exporting producers benefited from this scheme.

(e) Conclusion

195. Account taken of the above, the scheme has to be considered a subsidy within the meaning of Article 3(1)(a)(ii) and Article 3(2) of the basic Regulation in the form of foregone government revenue which confers a benefit upon the recipient companies.

196. The GOC was requested to provide information on the eligibility criteria for obtaining this subsidy and on the use of the subsidy, in order to determine to what extent access to the subsidy is limited to certain enterprises and whether it is specific according to Article 4 of the basic Regulation. The GOC provided no such information. The Commission, mindful of the requirement of Article 4(5) of the basic Regulation that any determination of specificity shall be "clearly substantiated" on the basis of positive evidence, therefore had to base its findings on the facts available, as stated under Section 4.1, in accordance with Article 28 of the basic Regulation.

197. This subsidy scheme is specific within the meaning of the Article 4(2)(a) of the basic Regulation given that the legislation itself, pursuant to which the granting authority operates, limited the access to this scheme only to enterprises that invest under specific business categories defined exhaustively by law (i.e. catalogue for guidance of industries for foreign investment and catalogue of key industries, products and technologies which the state currently encourages development). In addition, there are no objective criteria to determine eligibility and no conclusive evidence to conclude that the eligibility is automatic in accordance with Article 4(2)(b) of the basic Regulation. Indeed, although some administrative rules have been collected during the visit to the exporting producers, the lack of cooperation from the GOC authorities does not permit to assess the existence of such objective criteria.

198. Account taken of the above, this subsidy is considered countervailable.

(f) Calculation of the subsidy amount

199. The amount of countervailable subsidy is calculated in terms of the benefit conferred on the recipients, which is found to exist during the IP. The benefit conferred on the recipients is calculated by taking into consideration the VAT and duties exempted on imported equipment. In accordance with Article 7(3) of the basic Regulation this subsidy amount (numerator) has been allocated to the IP using a useful life corresponding to the average depreciation period of the industry concerned (i.e. 15 years). The resulting amount was then allocated over the total sales turnover of the co-operating exporting producers during the IP, because the subsidy is not contingent upon export performance and was not granted by reference to the quantities manufactured, produced, exported or transported.

200. The subsidy rate established with regard to this scheme during the IP for the cooperating exporting producers amounts to 1.17% for the APP Group and 0.61% for the Chenming Group.

- VAT rebates on domestically produced equipment

201. This scheme provides benefits in the form of VAT rebates paid for purchase of domestically produced equipment by