24 April 2017 (17-2223) Page: 1/8 Committee on Subsidies and Countervailing Measures Original: English SUBSIDIES REPLIES TO QUESTIONS 1 POSED BY THE UNITED STATES REGARDING THE NEW AND FULL NOTIFICATION OF CHINA 2 The following communication, dated 21 April 2017, is being circulated at the request of the Delegation of China. GENERAL 1. The United States appreciates China's answers to our previous questions. 3 However, we note that in several instances, China did not answer the question asked because, it appears, the programme at issue was not included in China's latest subsidy notification. This would seem to be contrary to the practice of all other Members who routinely ask, and answer questions about programmes not included in a notification. 4 Refusing to answer questions simply because the programme at issue was not included in a notification would seem to be contrary to the intent of the transparency provisions of the Agreement on Subsidies and Countervailing Measures (Subsidies Agreement) and the longstanding practice of Members and the Committee on Subsidies and Countervailing Measures (Subsidies Committee). Is it China's position that if a programme was not notified, it has no obligation to answer any questions asked about the programme? If so, could China explain its understanding of the legal basis under the Subsidies Agreement for not answering such questions, as many Members routinely do? China attaches great importance to the implementation of the relevant provisions on transparency of the Agreement on Subsidies and Countervailing Measures (ASCM). According to Article 25.8 of ASCM, any Member may, at any time, make a written request for information on the nature and extent of any subsidy granted or maintained by another Member. In practice, the United States has raised three lists of written questions to China under Article 25.8 since 2011 which involved a lot of programmes not covered by the subsidy notifications submitted by the Chinese Government. In response, China has observed the obligations under Article 25.8 and spent a huge amount of time and energy sorting out and verifying massive information, and made its best efforts at clarification in previous regular meetings of the SCM Committee. China believes that the questions on notifications regarding subsidies should focus on the subsidy programmes notified by China and should be discussed at special meetings of the SCM Committee as prescribed. This may avoid repeated discussions of the same topics at regular and special meetings of the Committee and ensure the working efficiency of the Committee. 1 G/SCM/Q2/CHN/68. 2 G/SCM/N/220/CHN-G/SCM/N/253/CHN-G/SCM/N/284/CHN. 3 G/SCM/Q2/CHN/57. 4 The United States, for example, currently has three sets of questions outstanding from three different Members. Two of the three sets of questions includes questions on programmes not notified by the United States. G/SCM/Q2/USA/67; G/SCM/Q2/USA/64. We will answer all of the questions asked of us, as we have always done in the past.
- 2 - QUESTIONS REGARDING NOTIFIED PROGRAMMES Programme 28 -- Preferential VAT policies for enterprises that employ disabled people. 2. Given that this programme is available to a wide range of industries "regardless of ownership, types, industries or locations," on what basis does China consider this programme to be specific under Article 2 of the Subsidies Agreement? China submits its subsidy notification pursuant to Article 25.1 of the ASCM with a view to observing the transparency obligation under this agreement. China does not prejudge the nature of the notified programmes. Programme 30 -- Preferential tax treatment for imported products exclusively used by the disabled people. 3. Given that this programme is available for any product used exclusively by disabled people, on what basis does China consider this programme to be specific under Article 2 of the Subsidies Agreement? What industry in China receives a benefit under Article 1 of the Subsidies Agreement? China believes that the products exclusively used by disabled people are specific products that meet the requirements of the ASCM for specificity. According to the Interim Provisions on the Exemption from Import Duties for Products Exclusively Used by Disabled People, units importing products exclusively used by disabled people refer to (1) enterprises and public institutions directly under the Ministry of Civil Affairs and welfare institutions, artificial limb factories and rehabilitation hospitals for glory soldiers affiliated to the civil affairs departments of provinces, autonomous regions and municipalities directly under the Central Government; (2) public institutions directly under China Disabled Persons' Federation (China Foundation for Disabled Persons) and welfare and rehabilitation institutions affiliated to the disabled persons' federations (foundations for disabled persons) of provinces, autonomous regions and municipalities directly under the Central Government. Programme 60 -- Preferential tax treatment for endangered wild animals and plants as well as their government of Macao SAR, China to China. 4. China states that the only beneficiary of this programme is the Office of the Administration of Import and Export of Endangered Species. Why is China notifying a programme that only benefits a Chinese government entity? China submits its subsidy notifications pursuant to Article 25.1 of the ASCM with a view to observing the transparency obligation under this agreement. China does not prejudge the nature of the notified programmes. Programme 86 -- Preferential tax treatment for anti-hiv-aids medicine. 5. China states that both imported and domestically produced anti-hiv-aids products are exempt from payment of VAT. If so, how does this programme provide a specific benefit under Articles 1 and 2 of the Subsidies Agreement? China believes that preferential tax treatment for anti-hiv-aids medicines belongs to tax preference for specific products. In strict accordance with the national treatment principle of the WTO, China provides preferential tax treatment for both imported and domestically produced anti-hiv-aids medicines. China does not quite understand the question raised by the United States. Is it the United States' view that China should treat domestic and imported products differently?
- 3 - OTHER PROGRAMMES Steel 6. China maintains that the United States' questions on steel programmes were responded to at the regular meeting of the Subsidies Committee in October 2015. While China did state during that meeting that it did not have certain preferential tax programmes, questions about several other aspects of the legal measures the United States has counter notified under Article 25.10 of the Subsidies Agreement have not been answered. 5 For example, The Steel Industry Adjustment and Revitalization Plan, Guo Fa [2009] No. 6 (20 March 2009), issued by the State Council, states, inter alia, that "Special funds are available for the investment in capital construction within the central budget " (emphasis added). The United States has reviewed the financial statements of several Chinese steel companies which reveals various government funds have been received. Leaving aside for the moment the steel measures counter notified by the United States at the sub-central levels of government (until China's sub-central subsidy notification is reviewed next spring), please describe the nature of the special funds received under the Steel Industry Adjustment and Revitalization Plan. Please refer to China's clarifications on programme item No.2 concerning the Steel Industry Adjustment and Revitalization Plan in the United States' submission (G/SCM/Q2/CHN/51) at the 2016 autumn regular meeting of the SCM Committee of the WTO, i.e. the plan does not include specific subsidies to the steel industry. As China stated at the above-mentioned regular meeting, China's current supportive policies to the steel industry can be mainly divided into three categories: those aimed at encouraging environmental protection and energy conservation, those supporting technological research, development and innovation, and those aimed at facilitating enterprises' structural adjustments. These policies are neither implemented for the steel industry or enterprises, nor contingent upon export performance. They reflect the real efforts made by China to address the global overcapacity and industrial restructuring. 7. The following question was asked in the United States' initial set of question but was not answered: "China has never notified a steel subsidy programme at either the central or sub-central level. Is it China's position that it has never provided a specific subsidy to the steel industry since becoming a WTO Member?" If not, could China please explain when it will notify such subsidies? The Chinese Government's third subsidy notification submitted in October 2015 (G/SCM/N/220/CHN-G/SCM/N/253/CHN-G/SCM/N/284/CHN) included relevant subsidies involving the steel industry such as programme No. 72 on incentive fund for transformation of energy saving technology in support of key energy saving projects and projects on the transformation of energy saving technology, and the programme No. 79 on special fund for the development of circular economy in support of the construction of key projects of circular economy. Any eligible steel enterprise may apply for these programmes. Non-Ferrous 8. China maintains that the United States' questions on non-ferrous programmes were responded to at the regular meeting of the Subsidies Committee in October 2015. However, we see no reference in China's intervention to most of the non-ferrous measures the United States has counter notified under Article 25.10 of the Subsidies Agreement. 6 For example, the State Council issued the Non-Ferrous Metals Industry Adjustment and Revitalization Plan, Guo Fa [2009] No. 14 (12 May 2009). In this plan, the State Council, inter alia, calls for: (1) "further expanding the scale of state purchase and storage of non-ferrous metals" (Article 4.2; emphasis added); (2) "a special fund for the newly added central government investments " (Article 4.3): and (3) "increased 5 See G/SCM/Q2/CHN/51. 6 G/SCM/Q2/CHN/51.
- 4 - support to the financing of backbone non-ferrous metal enterprises" (Article 4.9). Leaving aside for the moment the non-ferrous measures counter notified by the United States at the sub-central levels of government (until China's sub-central subsidy notification is reviewed next spring), please describe the nature of, and support provided under: (1) the state purchase and storage of non-ferrous metals; (2) the special fund for newly-added central government investments; and (3) the increased support to the financing of backbone non-ferrous metal enterprises, received under the Non-Ferrous Metals Industry Adjustment and Revitalization Plan. 9. The following question was asked in the United States' initial set of question but was not answered: "China has never notified a non-ferrous metal programme at either the central or sub-central level. Is it China's position that it has never provided a specific subsidy to the non-ferrous metal industry since becoming a WTO Member?" If not, could China please explain when it will notify such subsidies? Reply to 8-9: The Non-Ferrous Metals Industry Adjustment and Revitalization Plan does not include specific subsidies for the non-ferrous metals industry. For a long time, the non-ferrous metals industry has been regarded as the one of the major industries of energy- and resources-intensive and highlypolluting products, and has been subject to strict limitations in project examination and approval, financing and other aspects. Semiconductors 10. The United States acknowledges and appreciates that China has notified numerous semiconductor programmes and legal measures in the past. However, more recent measures have not been notified. While China stated in its answers that it has responded to Article 25.8 questions posed by the United States and the Article 25.10 counter-notification submitted by the United States during the April 2013 and October 2015 meetings of the Committee, we see no specific reference to semiconductor measures in China's interventions during those meetings. Leaving aside the sub-central programmes for the moment (until China's sub-central subsidy notification is reviewed next spring), our primary concern is the actions of the State Council in 2014 (i.e., the Guidelines to Promote National Integrated Circuit Industry issued in June 2014 and the approval of the establishment of a National IC Investment Fund Co. Ltd (IC Fund)), pursuant to the State Council Notification Regarding National Integrated Circuits Industry Investment Fund Establishment Approval (Guo Han [2014] No. 48). The 2014 Guidelines to Promote National Integrated Circuit (IC) Industry Development appear to provide a financial contribution and benefit under Article 1 of the Subsidies Agreement because there is a provision of government funds and the government investment is based upon national policy goals for the development of the IC industry without the expectation of specific rates of return. In addition, this programme appears to be specific under Article 2 of the Subsidies Agreement because the funds are only provided to the IC industry. Please explain why the measures issued by the State Council and related implementing measures was not included in China's most recent notification. The National IC Investment Fund Co ("the Fund Co") is a private equity investment fund corporation mainly engaged in equity investment businesses in the integrated circuits industry. The Fund is operated in a complete market-based way. Investment and business cooperation are carried out by a fund management company according to provisions of the articles of association of the Fund Co and other laws and agreements. Major decisions are made by voting by the Board of Directors. Governmental departments do not intervene in the decision-making processes of the Board of Directors and have no jurisdictions at all. Like other private equity in the world, the Fund's primary task is to seek profits for its shareholders, and all its investment behavior and speech are only out of its responsibilities for the shareholders. Therefore, National IC Investment Fund is not a subsidy within the jurisdiction of the ASCM of the WTO.
- 5-11. On July 28, 2016 the National IC Investment Fund Co, along with the Hubei Provincial Government, invested an unknown amount of capital into a newly established firm known as Yangtze River Storage Technology, which has a registered capital of 18.9 billion RMB 7. According to public statements from officials associated with the National IC Fund when discussing their investment into Yangtze River Storage, the investment was to address "the issue of more than one-quarter of imports are memory chips" thus the need to "implement the national strategy" and make a "major investment in Wuhan." 8 Premier Li Keqiang subsequently visited Wuhan XMC, a wholly owned subsidiary of Yangtze River Storage, and stated, [these investments] "could change the situation of massively relying on imported chips". 9 Please explain the rationale and commercial justification for investing in Yangtze River Storage Technology. The strategic investment mentioned by relevant leaders of the Fund Co meant that the company' s investment behavior in the storage project of Yangtze River Storage (Wuhan XMC) is in line with its own corporate market development strategy, and is a long-term strategic investment behavior of it. These measures are consistent with the market-based operation mechanism of the Fund Co. Investment and Interest Rate Subsidies 12. China states in response to the United States' questions on investment and interest rate subsidies in China that the United States should refer to China's latest subsidy notification (covering central government programmes). However, the measures cited in the United States' questions and counter notification 10 are not included in the referenced notification. It appears that China did not answer the questions asked because the programmes at issue were not included in China's subsidy notification. Is it China's position that if a programme was not notified, it has no obligation to answer any questions asked about the program? Please explain. Please refer to China's reply to the first question. 13. There appears to be a general investment system in China funded from the central budget of the central government (See, Interim Measures for the Administration of Central Budget Investment Subsidy and Interest Discount Projects, National Development and Reform Commission, Order No. 31 (8 June 2005); Interim Measures for the Administration of Central Budget Investment Subsidy and Interest Discount Projects, National Development and Reform Commission, Order No. 3 (15 June 2013). Article 3 of the 2013 measure states: Investment subsidies mentioned in these measures refer to investment subsidies given to local governments and investment subsidy projects given by the National Development and Reform Commission to qualifying enterprises. Interest discounts mentioned in these measures refer to loan interest subsidies given by the National Development and Reform Commission to qualifying investment projects that utilize mid- to long-term bank loans. Investment subsidies and investment discounts are gratis investments. 7 http://company.stcn.com/2016/0801/12818334.shtml. 8 http://www.ccidcyt.com/bdtdt/62418.htm. 9 http://www.xmcwh.com/news_detail/newsid=66.html. 10 See G/SCM/Q2/CHN/51, programme 42 and 43.
- 6 - Article 4 of the 2013 measure lists as one of the focuses of this programme as "Investment projects for industrialization of high and new technologies." Article 23 states that projects that do not have confidentiality requirements "shall be open to the public". a. Please explain why this programme and other related implementing measures have not been notified pursuant to Article 25 of the Subsidies Agreement. b. Please describe the industries and sectors that have benefitted under these measures. c. Article 7 of the 2005 measure placed limits on the amount of the investment subsidy. The 2013 measure does not have similar limits described. Are there limits on the amount of the investment subsidy under the 2013 measure? If so, please describe. Reply to a-c: The Interim Measures for the Administration of Central Budget Investment Subsidy and Interest Discount Projects are not specific in nature and do not involve the allocation and use of specific funds. For specific subsidy programmes, please refer to the notifications officially submitted by the Chinese Government. 14. There also appears to be an investment system for China's state-owned enterprises. In 2013, Article 2.1 of the Interpretation on 2013 Central State-owned Capital Management Budget states: Expenditures for structural adjustment of the state-owned economy [account for] 37.988 billion yuan, [which is] used to support strategic mergers and reorganizations between central enterprises, sort out equity relations in companies with multiple investor entities, sustain and strengthen central enterprises' controlling force on major subsidiaries that affect national security and national economy lifelines, as well as resolve the historical legacy problem of central enterprises. Article 2.3 of the same 2013 budget document states: Expenditures for industrial upgrading and development [account for] 17.676 billion yuan, [which is] used to enhance central enterprises' indigenous innovation ability, push forward major technology innovation and industrialization of scientific and technological achievements, carry out the "12th Five-Year" energy saving and emission reduction targets and tasks, support central enterprises' energy saving and emission reduction work, and support central enterprises' internal industrial integration. For 2014, Article 2.1 of the Interpretation on 2014 Central State-owned Capital Management Budget states: Expenditures for structural adjustment of the state-owned economy [account for] 61.51 billion yuan, [which is] used to provide key support to major structural adjustment mainly in the areas of optimizing industrial structure and capital layout, including central enterprises' strategic mergers and reorganizations and equity restructuring.
- 7 - Article 2.3 of the same 2014 budget document states: Expenditures for industrial upgrading and development [account for] 15.425 billion yuan, [which is] used mainly to support important industries involving the lifeline of the national economy and industrial upgrading and development projects in key areas, including breakthroughs in industrial development bottlenecks, breakthroughs in technology bottlenecks, integration of industry and research, and development of new industries. Although outside of the relevant reporting period, in 2015, Article 3.4 of the Interpretation on 2015 Central State-owned Capital Management Budget states: State-owned capital injections [account for] 53.6 billion yuan, including: 26.5 billion yuan expenditures for structural adjustment of the state-owned economy, [which is] used to sort out equity relations and support enterprise structural adjustment. Moreover, Article 3.5 describes an 8.8 billion yuan subsidy policy for state-owned enterprises. a. Please explain why the programmes described above (excluding the 2015 measure) have not been notified. b. What type of subsidy (e.g., grant, equity infusion) was provided under the subsidy policy described in Article 3.5 of the 2015 measure? What types of industries have received support under this policy? c. What state-owned companies received capital injections and funds for restructuring in 2009-2014 under the measures described above? d. Are any of the funds under the measures described above provided under the Ministry of Finance Notice on Issuing the Measure for the Administration of the Central State-Owned Capital Management Budget Key Industries Transformation Upgrading and Development Fund, Ministry of Finance, Cai Qi [2013] No. 389 (29 November 2013)? Please identify any measures relevant to the distribution of funds under the budget provisions cited above. What industries benefited from these funds? Reply to a-d: For the subsidy programmes involved in central budget expenditures, please refer to the three notifications on central policy subsidies as of 2014 submitted by China, and please raise questions regarding the new & full notification submitted by China according to Article 25.1. The state-owned capital management budget is a conduct of capital injection into enterprises by the State as a contributor, and is operated according to market-based principles, which is the same in nature as additional contributions made by the shareholders of big foreign companies to relevant companies. Currently, information on the central state-owned capital management budget has already been made public according to the requirement of the Budget Law and the Regulations of the People's Republic of China on the Disclosure of Government Information. Wild Capture Fisheries 15. The United States has counter notified forty-four fisheries subsidies measures. 11 Many of these measures were first raised in the context of China's trade policy review in 2014. In response, China has noted that one measure is a commercial agreement; one measure is not specific; and two programmes has been notified. When will China notify the remaining forty measures in the United States counter notification? 11 G/SCM/Q2/CHN/52.
- 8-16. As with other programmes, China appears to be of the opinion that if it has not notified a certain program, it is not obligated to answer any questions about that program. Please explain. 17. China has never notified a wild capture fisheries subsidies programme at either the central or sub-central level (with the possible exception of a preferential tax policy for a fish fries breeding program). Is it China's position that it has never provided a specific subsidy to the wild capture fisheries industry since becoming a WTO Member? If not, could China please explain when it will notify such subsidies? Reply to 15-17: These questions have already been raised by the United States in G/SCM/Q2/CHN/52 according to Article 25.8 and in G/SCM/Q2/CHN/59 according to Article 25.10, and China has responded to them in its central and local subsidy notifications, as well as at the autumn regular meetings held in October 2015 and 2016. Please refer to the contents of China's notifications and relevant meeting minutes. China's latest notification on central subsidy policies includes three fisheriesrelated subsidies. China is currently sorting out fisheries subsidies and will carry out research based on the results of and the progress made in relevant work.