(1)

On 21 December 2020, the European Commission (‘the Commission’) initiated an anti-subsidy proceeding with regard to imports of optical fibre cables originating in the People’s Republic of China (‘China’, ‘PRC’ or ‘the country concerned’) on the basis of Article 10 of the basic Regulation. It published a Notice of Initiation in the Official Journal of the European Union (‘the Notice of Initiation’) (2).

(2)

The Commission initiated the investigation following a complaint lodged by Europacable (‘the complainant’) on behalf of Union producers. The complainant represented more than 25 % of the total Union production of optical fibre cables (‘OFC’). The complaint contained evidence of subsidisation and of resulting material injury that was sufficient to justify the initiation of the investigation.

(3)

Prior to the initiation of the anti-subsidy investigation, the Commission notified the Government of China (‘GOC’) (3) that it had received a properly documented complaint, and invited the GOC for consultations in accordance with Article 10(7) of the basic Regulation. Consultations were held on 16 December 2020 with the GOC. However, no mutually agreed solution could be reached.

(4)

On 24 September 2020, the European Commission initiated a separate anti-dumping investigation with regard to the same product originating in the People’s Republic of China (4) (‘the separate anti-dumping investigation’). The injury, causation and Union interest analyses performed in the present anti-subsidy investigation and the separate anti-dumping investigation are mutatis mutandis identical, since the definition of the Union industry, the sampled Union producers, the period considered and the investigation period are the same in both investigations.

(5)

The Commission received comments on initiation from the GOC, the China Chamber of Commerce for Import and Export of Machinery and Electronic Products (‘CCCME’), one importer (Connect Com), and the complainant.

(6)

The GOC claimed that the investigation should not be initiated because the complaint did not satisfy the evidentiary requirements of Articles 11(2) and 11(3) of the WTO Agreement on Subsidies and Countervailing Measures (‘SCM Agreement’) and of Article 10(2) of the Basic Regulation. According to the GOC, there was insufficient evidence of countervailable subsidies, injury and a causal link between the subsidised imports and the injury. In response to this claim of the GOC, the complainant argued that the complaint contained information that was reasonably available to and that the complaint provided for more than ample evidence demonstrating the existence of subsidisation, injury and a causal link between the two. The GOC reiterated that the complaint did not contain sufficient evidence to meet the evidentiary standard and regardless of what information might be reasonably available to the complainant, there always needs to be sufficient evidence regarding the existence and nature of a subsidy, material injury and a causal link.

(7)

The Commission rejected the claim of the GOC. Indeed, the evidence submitted in the complaint constituted the information reasonably available to the complainant at that stage. As shown in the memorandum on sufficiency of evidence, which contains the Commission’s assessment on all the evidence at the disposal of the Commission concerning the PRC, and on the basis of which the Commission initiated the investigation, there was sufficient evidence at initiation stage that the alleged subsidies were countervailable in terms of their existence, amount and nature. The complaint also contained sufficient evidence of the existence of injury to the Union industry, which was caused by the subsidised imports.

(8)

Following final disclosure, the GOC argued that the Commission could not have used facts available to remedy the lack of evidence provided in the complaint. The Commission noted that the GOC misunderstood what the Commission did at initiation stage. As set out in recital (7), the complaint contained sufficient evidence pursuant to Article 10(2) of the basic Regulation to justify the initiation of an investigation. Logically, the complaint could not have included all the necessary information requested from the GOC, as this was part of the detailed assessment done by the Commission during the investigation. Moreover, the Commission examined the complaint in light of all the available information to the Commission as regards the alleged subsidisation, including its past practice. This does not mean that the Commission applies facts available but rather that the Commission uses all the information available to confirm the allegations made in the complaint. Therefore, the claim was rejected.

(9)

During the pre-initiation consultations and in its submission following initiation, the GOC alleged more specifically that the complainant used Chinese laws selectively and misinterpreted their connection with respect to the OFC industry and stated that policy documents, such as China’s High-tech Product Catalogue, Broadband China Strategy, the 13th Five-Year Plan, or Made in China 2025, are just guidance documents that are not binding. The China Chamber of Commerce for Import and Export of Machinery and Electronic Products (‘CCCME’) repeated this claim. The GOC also stated that the document ‘Made in China 2025’ does not specifically refer to OFC. The complainant argued that the Commission already established in previous investigations that China’s Five-Year Plans are of a binding nature.

(10)

The Commission noted that the GOC does not dispute the existence of such plans, programmes, or recommendations but only the extent to which they are binding for the OFC industry. The Commission further observed that the complainant provided evidence indicating that ‘optical fibre’ is mentioned in several government documents, while ‘fiber optic network’ is mentioned in the Made in China 2025 Strategy. The GOC failed to produce any evidence showing that those statements would not be applicable to the product concerned.

(11)

The GOC also stated that State-owned enterprises (SOEs), State-owned banks or the Chinese Export & Credit Insurance Corporation (‘Sinosure’) cannot be qualified as public bodies and that the complainant unjustifiably relied on previous Commission’s findings for entirely unrelated industries. The CCCME repeated the claim that State-owned banks cannot be qualified as public bodies. The complainant argued that the Commission has recognised State-owned banks and Sinosure as public bodies in previous investigations. The GOC claimed that past findings of the Commission for unrelated industries could not constitute sufficient evidence in the complaint that State-owned banks and Sinosure acted as public bodies in the current investigation.

(12)

The Commission noted that this claim of the GOC is connected to the claim already evoked above, and that the complaint among others mentioned the Bank Law in China, which the GOC does not dispute to belong to the Chinese legislation. The Commission also highlighted that recent EU anti-subsidy investigations had concluded differently on this matter (5). The fact that these investigations covered industries unrelated to the OFC industry does not cast aside the qualification of the above institutions as public bodies. Moreover, evidence of government ownership may be considered to amount to evidence ‘tending to prove or indicating’ that an entity is a public body capable of conferring a financial contribution (6).

(13)

Following initiation, the GOC further argued that the complainant did not establish the conditions for applying an out-of-country benchmark for loans and for land use rights. The Commission found, however, that the allegations contained in the complaint are supported by recent EU anti-subsidy investigations concluding on those matters the need for external benchmarks adjusted to the prevailing conditions in the PRC (7).

(14)

Furthermore, the GOC claimed that various subsidy schemes alleged by the complainant could not be considered a subsidy as the complaint did not provide for detailed evidence concerning the existence, amount and nature of these subsidies, or the direct relationship between the subsidy and the product concerned.

(15)

The complainant argued that the complaint provided examples of specific direct transfers of funds and specifically referred to annual reports of numerous Chinese exporting producers of OFC which clearly indicated direct transfers of funds received in the form of grants. In addition, the complainant provided a document published by one of the exporting producers identifying the financial support it received from the GOC.

(16)

The GOC further claimed, in relation to various subsidies, that the complainant failed to provide evidence of benefit and specificity. The Commission is of the view that the complainant provided sufficient evidence of benefit and specificity as was reasonably available to it. In any event, the Commission examined the evidence in the complaint and provided its own assessment of all relevant elements in the memorandum of sufficiency of evidence, which was put on the open file upon initiation. The GOC reiterated its comments following initiation, but did not provide any further evidence.

(17)

Therefore, the Commission concluded that there was sufficient evidence provided in the complaint tending to show the existence of the alleged subsidisation by the GOC.

(18)

Following initiation, the GOC and the CCCME argued that the complainant incorrectly set aside the fact that the OFC industry in the Union were granted subsidies very similar to those in the PRC and that the Commission should not apply double standards. The complainant argued that these allegations are irrelevant in the investigation at hand. The GOC disagreed and claimed that the Commission, by investigating alleged subsidies in China, it distorts the market to the detriment of non-Union competitors. Such approach would lead to protectionist measures, ultimately obstructing international trade and development.

(19)

This claim concerning subsidies in the EU had no weight on the Commission’s assessment underlying the initiation of this case, as they do not fall within the factors considered for this purpose.

(20)

Finally, in its comments following initiation, the GOC claimed that no actual sales information was provided in the undercutting/underselling calculation and that the questionnaire responses of the sampled Union producers did not provide a meaningful summary of sensitive information. The GOC asserted that this had prevented it from properly rebutting the injury claims made by the complainant, and that these questionnaire responses seemed to contradict the complaint with regard to the alleged injury.

(21)

The Commission considered that the version open for inspection by interested parties of the complaint and the questionnaire replies contained all the essential evidence and non-confidential summaries of data granted confidential treatment in order for interested parties to exercise their rights of defence throughout the proceeding. It is recalled that Article 29 of the basic Regulation allows for the safeguarding of confidential information in circumstances where disclosure would be of significant competitive advantage to a competitor or would have a significantly adverse effect upon a person supplying the information or upon a person from whom that person has acquired the information. The claims of the GOC in this regard were therefore rejected.

(22)

On the substantive requirements for the initiation of the investigation, the GOC and CCCME argued that the complainant failed to provide any comparable data on sales prices and profitability. The GOC and CCCME also claimed that the target profit indicated by the complainants was not justified and that the injury suffered by the complainants could have been caused by other elements including over stocking by one Union producer.

(23)

Connect Com supported the arguments of the GOC on initiation. In particular, Connect Com claimed that an anti-dumping and a parallel anti-subsidy investigations would possibly result in a double remedy for the EU industry and could lead to an abuse of countervailing measures. Connect Com argued that the allegations in the complaint on the existence of a subsidy, on injury and on a causal link between the subsidy and injury were not supported by sufficient evidence. Concerning the lack of evidence on a causal link, Connect Com claimed that there were number of alternative reasons for a decrease in the EU industry’s market share such as the increase of imports from other third countries during the period considered and that there was an overcapacity in the EU. In addition, Connect Com claimed that the complaint was a mere copy of the complaint of the anti-dumping investigation and that the complainant should have differentiated the alleged injury due to dumping from the alleged injury due to subsidy.

(24)

Moreover, the GOC and the CCCME claimed that there was no injury shown in the complaint, since the Union industry increased its production and the slight decrease in production capacity deriving from the inability of the Union Industry of supplying all newly developed consumption in Europe was not in itself an indicator of material injury. Sales volumes increased as well, while the Union industry retained a market share of almost 80 % and the profitability trend was unclear and did not show injury. In this respect, the complainant submitted that the increase in the Union consumption benefitted Chinese imports, the remaining market share did not bear relevance for the assessment of the injury, and the effects of tenders won by Chinese producers would materialise after a certain time lag. The CCCME responded that consumption, production and production capacity data showed that the Union industry was able to supply most of the increase in EU consumption, while expanding its business.

(25)

In addition, the GOC and the CCCME claimed that the complaint contained no evidence of a causal link between subsidized imports and injury. Firstly, the GOC and the CCCME argued that there was no correlation between imports from China and the development of the Union industry. By way of example, they submitted that amidst the strongest increase in import volume from China in 2017-2018, the Union industry had the most significant increase in profitability. Secondly, third-country imports increased between 2018 and 2019, contrary to imports from China, and their effect could not therefore be attributable to China, and, if there is injury, this was a self-inflicted injury due to the Union industry’s slow reaction to market movements.

(26)

The complainant reacted to this claim, stating that a causal link could be established, since the injury happened at the same time as the increase in imports from China, and that third-country imports could not be considered as a cause of injury because they were either de minimis or showed no evidence of injurious pricing.

(27)

The CCCME responded recalling that, amidst the strongest increase in import volume from China in 2017-2018, the Union industry had the most significant increase in profitability and that there was no correlation between the increase of imports from China and the decreasing sales volumes of the Union industry. Instead, as regards third-country imports, the CCCME noted that in total third-country imports increased, while imports from China decreased between 2018 and 2019. Finally, the CCCME observed that the complainant did not challenge the arguments that virtually all injury indicators in the complaint displayed positive trends and that the alleged injury was at least to a certain degree self-inflicted. Moreover, the CCCME claimed that the effects of the Covid-19 pandemic and allegations on the existence of a power-cable cartel should also be taken into account in evaluating the impact of subsidized imports on the situation of the Union industry. Furthermore, the GOC and the CCCME stated that import data presented by the complainant were not reliable because they were outdated and based on assumptions in terms of weight of the product concerned and its proportion in the CN code 8544 70 00. In addition, according to the GOC and the CCCME, undercutting calculations in the complaint were flawed because they referred only to one exporter in one specific tender.

(28)

The complainant referred to its reply in the parallel anti-dumping investigation, that a longer period should be considered to see the increase in volume of imports, not denied by the CCCME and confirmed by third-party data from market intelligence (CRU), and that calculations were not flawed because the complainant was bound to provide only reasonably available information, which included information from several producers in the Union and in China.

(29)

The CCCME responded that it was the duty of the complainant to substantiate its claims and provide proof in respect of import data and that market intelligence (CRU) data referred to optical fibres and not to optical fibre cables. As regards undercutting and underselling calculations, the CCCME reiterated that they did not meet the standard to constitute sufficient evidence and that for significant calculations the complainant referred only to the prices of one Chinese producer (e.g., the free circulation export price used for the calculation of the injury margin for H1 2019 and the export price used for the costs of production for the underselling margin for H2 2019).

(30)

The Commission considered that none of the allegations on initiation disproved the conclusion that there was sufficient evidence for the initiation of an anti-subsidy proceeding. Indeed, the complaint contained sufficient evidence that subsidized imports had materially injured the Union industry. The specific injury analysis of the complaint showed increased penetration of the EU market (both in absolute and relative terms) by imports from China made at prices which substantially undercut the Union industry’s prices. This suggested that the alleged subsidised imports had materially injured the Union industry, shown for example by decreases in sales and market share or by a deterioration of financial results.

(31)

The evidence provided in the complaint contained separate undercutting and underselling calculations for each representative product type. The Commission was satisfied with the level of evidence of undercutting and underselling brought forward by the complainant and considered that the complaint met the sufficient evidence standard required for the initiation of the investigation.

(32)

In reply to the claim that the complainant failed to provide reliable/comparable data on sales prices, the Commission considered that the version open for inspection by interested parties of the complaint contained all the essential evidence and non-confidential summaries of data provided under confidential cover in order for interested parties to exercise their right of defence throughout the proceeding.

(33)

Article 29 of the basic Regulation (as well as Article 12(4) of the SCM Agreement) allow for the safeguarding of confidential information in circumstances where disclosure would be of significant competitive advantage to a competitor or would have a significantly adverse effect upon a person supplying the information or upon a person from whom that person has acquired the information.

(34)

In relation to sufficient evidence of a causal link, the following should be noted. Firstly, the complaint showed that the situation of the Union industry deteriorated at the same time as the increase in subsidized imports at prices which significantly undercut those of the Union industry. This already tended to show the existence of a causal link. Secondly, concerning other factors such as third-country imports and other elements mentioned by the GOC and the CCCME , their impact was not as such as to cause deterioration of the Union industry, whereas, the analysis did not reveal self-inflicted injury. Moreover, concerning the allegation that the subsidy investigation would result in a double imposition, the Commission, as reported at recital (765), made sure that the imposition of a cumulated duty reflecting the level of subsidisation and the full level of dumping would not result in offsetting the effects of subsidisation twice. Finally, concerning import volumes, the complainant provided data based on reasonable assumptions such as the weight of the product concerned produced and sold by the Union industry, and used market intelligence to complete the analysis where public information was not available. Concerning the time period of the measuring of imports in the complaint, the alleged injury has been caused by both dumping and subsidies practices, and therefore a different investigation period would have been unreasonably burden on the complaining industry.

(35)

On 24 August 2021, in accordance with Article 29a(2) of the basic Regulation, the Commission informed the interested parties of its intention not to impose provisional countervailing measures and to continue the investigation.

(36)

Since no provisional countervailing measures were imposed, no registration of imports was performed.

(37)

The investigation of subsidisation and injury covered the period from 1 July 2019 to 30 June 2020 (‘the investigation period’ or ‘IP’). The examination of trends relevant for the assessment of injury covered the period from 1 January 2017 to the end of the investigation period (‘the period considered’).

(38)

Both the current anti-subsidy investigation and the separate anti-dumping investigation mentioned in recital (4) have the same investigation period and the same period considered.

(39)

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

(40)

Interested parties had an opportunity to comment on the initiation of the investigation and to request a hearing with the Commission and/or the Hearing Officer in trade proceedings. No one requested an intervention.

(41)

In its Notice of Initiation, the Commission stated that it had provisionally selected a sample of Union producers. The Commission selected the sample on the basis of the volume of production and sales of the like product in the Union during the investigation period. This sample consisted of three Union producers. The sampled Union producers accounted for 52 % of Union production in the investigation period and was considered representative of the Union industry. The Commission invited interested parties to comment on the provisional sample. No comments were received and therefore the sample was confirmed.

(42)

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

(43)

Five unrelated importers provided the requested information and agreed to be included in the sample. After analysing the sampling information supplied by the importers, the Commission decided that sampling was not necessary and asked all cooperating importers to submit their replies to the questionnaire.

(44)

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

(45)

Twenty five exporting producers in the country concerned provided the requested information and agreed to be included in the sample. In accordance with Article 27(1) of the basic Regulation, the Commission selected a sample of two groups of exporting producers on the basis of the largest representative volume of exports to the Union which could reasonably be investigated within the time available. The sampled groups of exporting producers represented more than 40 % of the exports reported by cooperating exporting producers of optical fibre cables from China to the Union during the investigation period.

(46)

In accordance with Article 27(2) of the basic Regulation, all known exporting producers concerned, and the authorities of the country concerned, were consulted on the selection of the sample.

(47)

Comments on the selection of the sample were received from one non-sampled exporting producer, Yangtze Optical Fibre and Cable Joint Stock Limited Company (‘YOFC’), which wanted to be included in the sample.

(48)

YOFC argued that considering the large number of cooperating exporting producers, the two sampled companies accounted for a relatively low proportion of export volume to the Union that was not representative for the Chinese exporters and that the Commission’s practice in previous anti-dumping investigations was to sampled at least three companies. Furthermore, YOFC claimed that a sample of three companies could better avoid the situation that, due to changes to the sampled companies, the sample could be reduced to one company. Finally, YOFC argued that certain subsidy programmes are regional, so to have a more comprehensive overview of the subsidy schemes in the China the geographical spread should be considered when selecting a sample.

(49)

Pursuant Article 27(1) of the basic Regulation the selection of the sample should be based on the largest representative volume of production, sales or exports which can reasonably be investigated within the time available. As stated in recital (45), the sampled groups of exporting producers accounted for more than 40 % of the reported exports from China to the Union during the investigation period, a representative level. The Commission considered that the sample as selected contained the largest quantity of imports that could be reasonably investigated within the time available. In this context, the two sampled exporting producer groups contain a large number of entities (four exporting producers, seven sales entities, and more than 20 related companies providing inputs or financing). Furthermore, whether a sampled company will indeed cooperate or not after being sampled is a necessary but not sufficient condition for an exporting producer to be considered for the selection of a sample under Article 27(1) of the basic Regulation. The Commission also considered the geographical spread of the companies selected in the sampled, covering two provinces in China with the two exporting producer groups and many more provinces with all the related companies providing inputs or financing. As all requirements in Article 27(1) of the basic Regulation were hence met there was no obligation to sample a third company.

(50)

YOFC also claimed that it should be included in the sample as it is an experienced producer that exports high quality optical fibre cables to the Union, and its manufacturing process is different from other Chinese producers (it is vertically integrated, uses European technology to produce optical fibre cables, has advanced technologies, is the sole National Intelligent Manufacturing Demonstration Unit in China, and has achieved high automatization in the production of optical fibres). It further claimed that its export volume to the Union during the investigation period was relatively large. Moreover, YOFC submitted that one of the sampled Union producers indirectly holds shares of YOFC and two of the related companies concerned of YOFC and, therefore, including YOFC in the sample would enable the Commission to have a more comprehensive knowledge of the structure of the industry. YOFC also claimed that there are five exporting producers in the group, which are located in Hubei Province, Guangdong Province, Sichuan Province, Jiangsu Province and Shanghai City, so by including YOFC in the sample, the Commission would obtain information on subsidy programmes in more provinces.

(51)

As explained above, the sample of exporting producers was selected on the basis of the largest percentage of the volume of exports from the country in question which could reasonably be investigated within the time available, having a good geographical spread within China. YOFC was not among the largest exporting producers and therefore was not sampled. At any rate, the two sampled groups of exporting producers are large experienced groups of companies as well that manufacture and sell high quality optical fibre cables to the Union, including also vertically integrated entities. Furthermore, there is no information in the file indicating that the technology used by the sampled exporting producers would be less advanced than other Chinese exporting producers. YOFC has not presented any evidence that would contradict this fact. Moreover, the fact that one sampled Union producer holds shares in an exporting producer is not relevant for the selection of the sample of the exporting producers. Therefore, these claims were rejected.

(52)

Six of the non-sampled Chinese exporting producers that returned the sampling form informed the Commission of their intention to request individual examination under Article 27(3) of the basic Regulation. The Commission made the questionnaire available online on the day of initiation. Moreover, the Commission informed the non-sampled exporting producers that they were required to provide a questionnaire reply if they wished to be examined individually. Two companies provided a questionnaire reply.

(53)

One of the companies who provided a questionnaire reply, requested to be individually examined for the same reasons as in its request to be included in the sample, as set out in recitals (48) and (50) above.

(54)

The other company who provided a questionnaire reply, requested to be individually examined because it was related to a Union importer and it claimed to not have received any of the alleged subsidies.

(55)

Due to the complexity of the investigation and the complex structure of the sampled exporting producers, the Commission decided not to grant individual examination as it would have been unduly burdensome and could have impeded the Commission to complete the investigation within the statutory deadlines.

(56)

The Commission sent a questionnaire to the complainant and the questionnaires for the Union producers, importers, users, and exporting producers in China were made available online on the day of initiation (8).

(57)

The Commission also sent a questionnaire to the GOC, which included specific questionnaires for Sinosure, the banks and other financial institutions that provided financing or export credits to the sampled exporting producers, and the top 10 producers and distributors of the input materials used by the sampled exporting producers. The GOC was also asked for administrative convenience to gather any responses provided by these financial institutions and to send them directly to the Commission.

(58)

The Commission received a questionnaire reply from the GOC, which included a questionnaire reply from the Export-Import Bank of China (‘EXIM bank’). However, no reply was received from Sinosure, any of the other banks or financial institutions, or from the main producers and distributors of the input materials.

(59)

Without prejudice to the application of Article 28 of the basic Regulation, the Commission sought and crosschecked all the information deemed necessary for the determination of subsidy, resulting injury and Union interest. Due to the outbreak of the COVID-19 pandemic and the consequent measures taken to deal with the outbreak (‘the COVID-19 Notice’) (9), the Commission was unable to carry out verification visits at the premises of the GOC, the sampled companies and the cooperating importers and users. Instead, the Commission performed a remote crosscheck (‘RCC’) of the information provided by the GOC, during which officials from the relevant ministries and other government authorities participated. The Commission furthermore carried out RCCs of the following companies via videoconference:

(60)

On 10 May 2021, the Commission sent an additional request for information to the cooperating non-sampled exporting producers, to the sampled exporting producers and to the sampled Union producers including but not limited to sales data on the basis of groups of product control numbers (‘PCNs’), investments and tenders. The replies were checked by the Commission during the RCCs.

(61)

On 24 August 2021, pursuant to Article 29a(2) of the basic Regulation, the Commission informed interested parties that it intended not to impose provisional measures and to continue with the investigation.

(62)

The Commission continued seeking and checking all information it deemed necessary for its definitive findings.

(63)

On 14 September 2021, the Commission informed all parties of the essential facts and considerations on the basis of which it intended to impose a definitive anti-subsidy duty on imports of the product concerned (‘final disclosure’).

(64)

All parties were granted a 20 days period within which they could make comments on the definitive disclosure. Interested parties had an opportunity to comment on the initiation of the investigation and to request a hearing with the Commission and/or the Hearing Officer in trade proceedings.

(65)

Comments were received from the complainant, the GOC, the CCCME, the two sampled exporting producers, and one unrelated importer, namely Connect Com GmbH (‘Connect Com’). Two cooperating non-sampled exporting producers provided clarifications on clerical errors made by the Commission on their cooperating status and exact name, which were corrected accordingly.

(66)

Following final disclosure, interested parties were granted an opportunity to be heard according to the provisions stipulated under point 5.7 of the Notice of initiation. A hearing took place with CCCME.

(67)

The Commission addressed in this regulation comments submitted during the anti-subsidy procedure. Comments submitted in the context of the separate anti-dumping investigation were not addressed in this regulation unless the parties explicitly indicated that the comments submitted covered both procedures.

(68)

The product concerned is single mode optical fibre cables, made up of one or more individually sheathed fibres, with protective casing, whether or not containing electric conductors, originating in China, currently falling under CN code ex 8544 70 00 (TARIC code 8544700010) (‘the product concerned’).

(69)

The following products are excluded:

(70)

The optical fibre cables (‘OFC’) are used as an optical transmission medium in telecommunication networks in long haul, metro and access networks.

(71)

The investigation showed that the following products have the same basic physical, chemical and technical characteristics as well as the same basic uses:

(72)

The Commission decided at this stage that those products are therefore like products within the meaning of Article 2(c) of the basic Regulation.

(73)

The ZTT Group requested the exclusion from the investigation of optical ground wire (‘OPGW’) and optical phase conductor (‘OPPC’) cables. It argued that although these cables fell under the product definition, they had different physical characteristics and use (i.e. power transmission), were subject to different technical standards, were manufactured using different raw materials and according to different production processes, and were sold in separate markets. Furthermore, it was claimed that OPGW and OPPC cables represented only a small portion of sales to Union. The ZTT Group also requested that in case the Commission considered that OPGW and OPPC cables fell within the product scope of the investigation, the specific features, end-use or market segment factors of these products be taken into account in the investigation.

(74)

OPGW and OPPC cables are used for data transmission and share the basic characteristics of other OFC, including: (i) they include optical fibres; (ii) the coated optical fibre diameter is the same range; (iii) the number of fibres is also in the same range; (iv) the number of fibres per module is equally the same; and (v) the construction of the cable core is the same. The fact that OPGW and OPPC cables have an additional use (power transmission) and certain features (such as electrical features, no flame resistance requirement, high tensile strength requirement, etc.) does not detract from this fact.

(75)

Furthermore, all cable types are subject to a certain extent to different technical specifications and standards. Regarding the raw materials, the fact that one material used for one component of the OFC may differ from one type of cable to another is irrelevant: all types of OFC are manufactured using optical fibres. Regarding the manufacturing processes, the investigation revealed that certain specially protected designs of standard optical cables had a layer of steel wire around their jacket, and these cables were made on the same machines as OPGW machines. Furthermore, the manufacturing of the armouring of OPGW and OPPC cables only applied to one stage of the construction of these cables, and this did not justify their exclusion from the product scope of the investigation. Furthermore, the fact that the sales of OPGW and OPPC cables represented a smaller portion of sales to the Union during the investigation period is irrelevant for the assessment of the claim. Finally, the Union industry is producing OPGW and OPPC cables as well and therefore is in direct competition with the Chinese exporters for these cables as well.

(76)

Based on the foregoing, the Commission concluded that OPGW and OPPC are OFC that have the same basic physical, technical and chemical characteristics as the other OFC that are covered by the definition of the product concerned and therefore no separate analysis for these products was needed. In fact, the product control numbers used by the Commission for the calculation of dumping and injury margins properly identifies OPGW and OPPC cables and adequately enables the Commission to conduct a fair price comparison between Union and Chinese producers. Therefore, the claim was rejected.

(77)

The ZTT Group also suggested four methods to address and avoid any possible issues of circumvention in the event that OPGW and OPPC cables were excluded from the product scope of the investigation such as (i) visual inspection and documentary check by customs officials, (ii) system of certification, (iii) end-use control customs procedure and (iv) system of monitoring. As it was concluded that OPGW and OPPC are covered by the investigation, it was not needed to address the suggested methods for preventing circumvention.

(78)

Before analysing the alleged subsidisation in the form of subsidies or subsidy programmes, the Commission assessed government plans, projects, and other documents, which were relevant for the sector of the product concerned and/or its inputs and hence represented integral context for the substantive findings. It found that all subsidies or subsidy programmes under assessment form part of the implementation of the GOC’s central planning to encourage the OFC industry for the following reasons.

(79)

The direction of the Chinese economy is to a significant degree determined by an elaborate system of planning which sets out priorities and prescribes the goals the central and local governments must focus on. Relevant plans exist at all levels of government and cover all economic sectors. The objectives set by the planning instruments are of binding nature and the authorities at each administrative level monitor the implementation of the plans by the corresponding lower level of government. Overall, the system of planning in the PRC results in resources being allocated to sectors designated as strategic or otherwise politically important by the government, rather than being allocated in line with market forces (10).

(80)

The OFC equipment is regarded as a key product by the GOC, as found in public policy documents and lists (11). Such categorisation is of significant importance as it qualifies given sectors for coverage by a variety of specific policies and support measures designed to spur development in each sector (12). OFC being a key component of internet networks infrastructure, it plays a paramount role in the roll-out of optical fibre networks and broadband internet. The development of the latter in the PRC is guided and managed by numerous plans, directives and other documents, which are issued at national, regional and municipal level, and are mutually interlinked. Examples of such key policy documents include the following plans, projects and other documents.

(81)

The 13th Five-Year Plan for National Economic and Social Development of the PRC (‘the 13th Five-Year Plan’), which covers the period 2016-2020, highlights the strategic vision of the GOC for improvement and promotion of key industries. The 13th Five-Year Plan emphasised the GOC’s intention to strengthen the development of strategic high technologies, among which information technology is included in Chapter 6. Chapter 23 further stipulated that information networks, under which OFC fall, are considered a ‘strategic emerging industry’. In this respect, the 13th Five-Year Plan states that the GOC will ‘help ensure rapid development of the production and innovation chains of emerging industries to accelerate industry clustering according to their specific characteristics’ and ‘encourage Chinese enterprises to allocate innovation resources globally’.

(82)

Following final disclosure, the GOC claimed that there is no reference to OFC in the 13th Five-Year Plan and that the Commission simply assumed that OFC falls under the categorisation of ‘information networks’. According to the GOC, Chapter 6 of the 13th Five-Year Plan clearly mentions that its focus will be ‘general-purpose’ technologies and Chapter 23 makes no mention of the OFC industry and the term ‘information network’ in Chapter 23 makes it clear that it does not concern OFC or specific products but rather general infrastructure. Likewise, Chapter 25 speaks of ‘optic networks’ and not about specific products, such as OFC.

(83)

Chapter 4 ‘The Development Philosophy’ of the 13th Five-Year Plan lists ‘information technology adoption’ among the development priorities. This Chapter defines the focus and priorities in order to achieve the objectives of the 13th Five-Year Plan and the items listed therein are of a strategic importance. Therefore, ‘information technology’ is considered as a key component of the country’s development for the period covered by the 13th Five-Year Plan. Furthermore, the 13th Five-Year Plan refers to ‘information technology’ in numerous Chapters concerning diverse sectors of the economy and society.

(84)

Section 2 ‘Strategic Industries’ of Chapter 23 ‘Develop Strategic Emerging Industries’ in the 13th Five-Year Plan provides that ‘we will foster strategic industries in the fields of aerospace, oceanography, information networks, the life sciences, and nuclear technology’ Furthermore, Chapter 25 ‘Build Ubiquitous, Efficient Information Network’ provides that ‘We will accelerate the construction of high-speed, mobile, secure, and ubiquitous next generation information infrastructure and spread the use of information network technology’ which includes ‘new generation high-speed fibre-optic networks’, ‘an advanced and ubiquitous wireless broadband network’, and ‘new information network technology’. In addition, Box 9 provides a list of information technology projects among which is the National Broadband Agenda with a focus to ‘establish a high-speed, high-capacity optical telecommunications system’.

(85)

The 13th Five-Year Plan is the key policy document which sets the priorities for national economic and social development of the PRC and as such it underlines the focus areas without necessarily providing all the details for the concrete achievement of the priorities. Therefore, the fact that OFC as such is not mentioned in the 13th Five-Year Plan does not mean that it is not concerned as a key and indispensable component for the achievement of the more general strategic goal of development of information technology and information network infrastructure.

(86)

The ‘new generation of information technology industry’, which includes OFC as information and communication device, is also an encouraged industry under the Made in China 2025 initiative (13). In this initiative, the promoted ‘information communication equipment’ is also defined as ‘super high speed and large capacity intelligent optical transmission technology’ and further under ‘Strategic Tasks and Priorities’, priority is given to acceleration of the deployment and construction of ‘fiber optic network’.

(87)

By being an encouraged industry in the Made in China 2025 strategy, the OFC industry is eligible to benefit from considerable State funding. A number of funds had been created to support the Made in China 2025 initiative (14) and hence indirectly the OFC industry, such as the National Integrated Circuit fund (15), the Advanced Manufacturing Fund (16) and the Emerging Industries Investment Fund (17).

(88)

By including the construction of fibre optic network as one objective in the Made in China 2025 strategy, or in any other strategic planning document, products which are essential to achieve the enhanced and improved expansion of the construction of those networks, such as the optical fibre cables used for transmission, fall under the scope of those strategic plans and are thus beneficiary of the corresponding preferential measures.

(89)

Furthermore, OFC is often included under the umbrella of ‘New generation of Information Technology Industry’ and in particular as ‘Information and communication equipment’. The Made in China 2025 Roadmap (18) gives 10 strategic sectors, which are the key industries for the GOC. It describes in Sector 1 ‘New generation of information technology industry’/ 1.2 Information and communication equipment the product categories ‘high-speed and large-capacity optical transmission equipment (400G/1Tbps)’ and ‘high-speed optical access equipment (10G/100Gbps)’ as products that fall under the development priorities of this sector. The new generation of information technology thus benefits from the advantages stemming from the support mechanisms listed in the document, including, among others, financial support policies, fiscal and taxation policy, and State council oversight and support (19).

(90)

Furthermore, OFC is related to the category ‘new materials’. In the Made in China 2025 Roadmap in Section 9 ‘new materials’ and its subcategories, including key strategic materials (point 9.2), high performance fibres and composite materials are listed. As can be seen in the Catalogue of High and New Technology Products (2006) in No 6020004 and 6020005, optical fibre products, especially those linked to optical fibre preform, which is a main input material for the production of OFC, are considered to constitute ‘new materials’.

(91)

Following final disclosure, the GOC claimed that the Commission did not explain on what basis it considered OFC as ‘new materials’. It stressed that Section 9.2.3 of the roadmap document only refers to ‘high-performance fibres and composite materials’ and that only the main input material for the production of OFC is considered to constitute ‘new materials’ and not OFC as such.

(92)

In this respect, the Commission reiterated that in the Catalogue of High and New Technology Products (2006) optical fibre products, including notably optical fibre preform, are considered to constitute ‘new materials’. Optical fibre preform is a key input material with high added value for the production of OFC, representing a substantial part of the cost of production. Therefore, the Commission concluded that since optical fibre preform, which is a semi-finished product of OFC is listed as ‘new material’, there is a direct link between OFC and the category of ‘new materials’.

(93)

Additionally, further to the Made in China 2025 Roadmap, in November 2016, the list of 10 strategic sectors was refined into a Catalogue of Four Essentials (20) published by the National Manufacturing Strategy Advisory Committee (NMSAC), an advisory group to the National Leading Small Group on Building a National Manufacturing Power. This group was established by the GOC to develop plans, policies, projects, and work arrangements to promote the development of the manufacturing industry and to coordinate matters across regions and departments (21). In this catalogue, each of the 10 strategic sectors is split into four chapters: (i) core essential spare parts, (ii) key essential materials, (iii) advanced essential processes/technologies and (iv) industry technology platforms. Optical fibre cables can be found under sector 1: new generation information technology, point (i) core basic spare parts, sub-point 38 Ultra-low-loss optical fibre based on 400G bandwidth (mains network) and under point (ii) key basic materials, sub-point 22 New-generation fibre optic materials.

(94)

Following final disclosure, the GOC reiterated its position that the 13th Five-Year Plan and the Made in China 2025 initiative are not mandatory or legally binding documents.

(95)

In this respect, the Commission pointed out that rather than making only general statements of encouragement, the 13th Five-Year plan uses language which points to its binding nature. In any case, as stated in recital (85), the 13th Five-Year Plan is the key policy document which sets the priorities for national economic and social development and is the basis for various binding legal acts that the authorities need to take into account and implement when adopting new rules or when distributing public resources.

(96)

Regarding the Made in China 2025 initiative, it needs to be read in conjunction with the Made in China 2025 Roadmap and considering the funds that had been created to support the Made in China 2025 initiative. Although the Made in China 2025 initiative mainly sets general principles to be followed, its implementation through the disbursement of State funding to certain encouraged industries is binding and makes it specifically targeting such encouraged industries and not generally applicable. In addition, the Made in China 2025 strategy uses wording that implies objectives and targets to be met such as ‘we will speed up the deployment and construction of fiber optic networks’ and ‘we will vigorously promote breakthrough development in key areas’ when referring to ‘a new generation of information technology industry’ including ‘information and communication devices’.

(97)

Therefore, the Commission rejected the claims of the GOC.

(98)

The OFC industry is also covered by the Intelligent Manufacturing Development Plan (2016-2020) published by the Chinese Ministry of Industry and Information Technology (‘MIIT’) (22), which aims at implementing the 13th Five-Year Plan and has set up 10 key tasks that aim at shortening the product development cycle, improving production efficiency, product quality, reducing operating cost, resources and energy consumption, and accelerating the development of intelligent manufacturing. In 2018, the State Council announced China’s plans to expand its programme for smart manufacturing by adding about 100 pilot projects that same year and according to publicly available information, two companies related to sampled exporting producers, Zhongtian technology precision materials Ltd and Fiberhome Communication Technology, were included on the List of Smart Manufacturing Pilot Demonstration Projects by the MIIT, the first in 2017 (23) and the latter in 2018 (24). Furthermore, one of the cooperating exporting producers, Yangtze Optical Fibre and Cable, was listed as ‘National First Batch Smart Manufacturing Pilot Enterprise’ (25).

(99)

There are clear indications that being mentioned on one of these lists, which are related to the Made in China 2025 strategy, is not only a laudatory remark, but that there are financial benefits associated with it. In the document called ‘MOF Notice concerning the transferred amounts for 2017 local industry transformation and upgrade programmes’, there is a corresponding entry in line 151 stating that Fiberhome Communication Technology under the programme ‘New Manufacturing mode of 5G communication network core equipment’ received a subsidy in the amount of 12 million RMB.

(100)

Numerous additional documents support the finding that the GOC has created a broad framework of support of internet technology infrastructure and broadband networks that cover inter alia the OFC industry. Already in 2009 in the Plan for the Adjustment and Revitalization of the Electronic Information Industry (26), the GOC explicitly expressed its objective to ‘guide and promote the construction of […] the broadband fiber-optic access network’.

(101)

In the Broadband China Strategy of 2013 (27) the GOC formulated the aim to promote ‘access networks […] in accordance with the ideas of high-speed access’ and that ‘in urban areas, access network construction and renovation will be carried out using technical methods such as fibre-to-the-home and fibre-to-the-building’. Also, according to this strategy, the ‘extension of optical fibre to the user side’ shall be promoted and ‘a fixed broadband access network with optical fibre as the main source’ shall be gradually build.

(102)

In the chapter in the Broadband China Strategy addressing the policy instruments, the GOC describes the instruments that are used to achieve the goals of this strategy, i.e. making ‘full use of various special funds from the central government to guide relevant local funds to invest in broadband network research and development and industrialization’ and of providing ‘subsidised interest support for loans to eligible broadband construction projects in national development zones in the western region’ and finally of strengthening ‘tax concession support’ and of ‘support [for] the construction of broadband networks’. As set out in recital (80), the Commission considered OFC to be a key component of internet networks infrastructure and indispensable for the set-up of broadband systems.

(103)

The Broadband China Strategy does not merely state non-binding objectives with regard to the development of the internet infrastructure. When viewed together with other documents it is clear that financial contributions from the GOC are an essential element used to achieve the objectives of this strategy. In the Opinions on Promoting the Construction of Fiber Optic Broadband Networks (28), it is stated that ‘local governments at all levels are encouraged to provide financial subsidies for the use of fiber-optic broadband in public service institutions’ and that ‘investment and policy support in research and development of core chips, devices, system equipment and applications for fiber-optic broadband communications’ shall be increased and ‘technological innovation in fiber-optic communications’ shall be encouraged.

(104)

Following final disclosure, the GOC claimed that the Broadband China Strategy is only a guidance document concerning broadband infrastructure. In this regard, the GOC noted that the Panel in ‘China – GOES’ found that ‘general information about governmental policy, with no direct connection to [a] program at issue, in not “sufficient evidence” of specificity’.

(105)

In this respect, the Commission recalled that as stated in recital (102), in the chapter in the Broadband China Strategy addressing the policy instruments, the GOC describes the instruments that are used to achieve the goals of this strategy such as the use of various special funds, subsidised interest support, tax concession support etc. Therefore, the Commission considered in recital (103) that when viewed together with other documents, it is clear that financial contributions from the GOC are an essential element used to achieve the objectives of this strategy. Therefore, even though Broadband China Strategy is claimed to be of a guidance nature, its implementation through the disbursement of State funding to certain encouraged industries only makes it binding and specifically targeting such encouraged industries and not generally applicable. In any event, the reference to the Panel Report in ‘China – GOES’ is not decisive as concerns specificity, because in this case the numerous plans and policy documents issued by GOC covered in this section provide specific guidance and support for the product concerned. Therefore, the claim was rejected.

(106)

In the Guiding Opinions of the State Council on Actively Promoting the ‘Internet Plus’ (29) from 2015, a clear objective is formulated by stating that this document shall help to ‘accelerate the implementation of the “Broadband China” strategy, organize and implement the national new generation information infrastructure construction project [and] promote the transformation of fiber optic broadband network.’ And the way to achieve this goal is described under ‘(6) Strengthen guidance and support’ where it is elaborated that fiscal and taxation support shall be increased and tasks are specified such as ‘actively invest in the research and development and application demonstration of qualified “Internet +” integrated innovation key technologies. Coordinate the use of existing financial special funds to support the construction of “Internet +” related platforms and application demonstrations.’

(107)

In 2015, the GOC furthermore outlined the plan for financial investments foreseen to ‘speed up infrastructure construction’ in the ‘Guidance from the General Office of the State Council on Speeding up the Construction of High-Speed Broadband Networks and Promoting the Speed Reduction of Network Speed-up Fees’ (30). In this document it is stated that the GOC, in order to achieve this objective ‘will accelerate the construction of all-fiber network cities and fourth-generation mobile communications (4G) networks, with more than 430 bil yuan invested in network construction in 2015 and no less than 700 bil yuan in 2016-2017’ and ‘promote the fiber-to-the-home process, complete the fiber-optic transformation of 45 000 copper cable access zones in 2015, and [to] build more than 80 million new fiber-to-the-home households.’

(108)

The approach of the GOC to define encouraged industries and products in catalogues in order to allocate resources accordingly, based on their strategic or political importance as attributed by the GOC, and to implement and supervise the plans at each administrative level can be further observed by examining the Catalogue of Strategic and Emerging Products and Services of the National Development and Reform Commission (NDRC) from 2016 (31). Again, the establishment of a new generation of IT industry is envisaged, including a new generation of information network industry. To achieve this objective, certain products are included in the catalogue of strategic and emerging products. OFC clearly is one of the products as the reference to ‘Optical communication equipment. Including fiber’ is unequivocal. The enumeration of technological specificities of the equipment concerned, such as ‘G.657 fiber for FTTx, large effective area G.655 fiber, G.656 fiber, low-loss and ultra-low-loss light that meets G.652 standards Fiber, […] Optical transmission equipment, single channel line rate 10Gbit/s, 40Gbit/s, 100Gbit/s, 200Gbit/s, 400Gbit/s’ show not only that OFC is considered a strategic and emerging product by the GOC but also the degree of detailed planning by the GOC that extends to the level of certain technological products.

(109)

The same approach – to define objectives in plans and further implementing them by defining technical details in catalogues – is used in the Catalogue of High and new Technology Products (32), where OFC are covered as communication product in No 1020011, which includes ‘SDH optical fiber transmission system with single-mode fiber transmission medium, high-speed data transmission channel, the transmission rate of 10Gbit / s and 40Gbit / s, for communication lines and metro backbone network’. Already in 2003, OFC was listed in the Catalogue of Encouraged Hi-Tech Products for Foreign investment in the category Communication Equipment and Products (33) under number 42 as ‘10Gb/s and above SDH fiber communication equipment’.

(110)

Following final disclosure, the GOC and Connect Com claimed that the Commission did not demonstrate that the various documents mentioned in Section 3.1 ‘specifically’ support or encourage the OFC industry although Article 4(2)(a) of the basic Regulation requires the Commission to demonstrate that a GOC document ‘explicitly limits access’ to certain enterprises and that such a requirement under Article 2.1(a) of the SCM Agreement entails the demonstration of a limitation that is ‘express…unambiguous and clear’ (34). Connect Com further referred to Article 4(5) of the basic Regulation which requires that specificity must be clearly justified on the basis of positive evidence and claimed that the Commission did not meet this requirement. The GOC further argued that the Commission bases itself on the incorrect assumption that if network infrastructure is supposedly encouraged, everything that makes up that network is encouraged. The GOC stated that numerous documents mentioned by the Commission, such as the 13th Five-Year plan, the Made in China 2025 initiative, the Intelligent Manufacturing Development plan (2016-2020), the 2009 Plan for Adjustment and Revitalization of the Electronic Information industry and the Broadband China Strategy of 2013, do not concern the product OFC or the OFC industry but rather downstream networks or the deployment of broadband, i.e. general infrastructure. According to the GOC, given that building networks requires many inputs and products, the Commission should clearly explain exactly which products and services making the infrastructure it considers to be encouraged. Additionally, the GOC claimed that the ‘roll-out’ of the network or broadband is not related to goods but rather to infrastructure development and services, since such roll-out concerns the improvement of general telecommunication services.

(111)

The Commission disagreed. As explained in recital (80), OFC is a key component of internet networks infrastructure and it plays a paramount role in the roll-out of optical fibre networks and broadband internet. The broadband infrastructure refers to networks of deployed telecommunications equipment and technologies necessary to provide high-speed internet access and other advanced telecommunication services (35) and OFC is a main part of the transmission equipment. Therefore, the building of the broadband infrastructure and networks requires the use of products necessary to the transmission of data and does not consists mainly in the provision of services as the GOC seems to imply. Actually, the provision of services would be the result of the existence of such infrastructure once built. Therefore, if the building of the broadband infrastructure is encouraged by the GOC, key products which are indispensable for the building of such infrastructure and which form an integral part of it are also encouraged by the GOC. The Commission is of the opinion that the normative framework resulting from the implementation of the various documents mentioned in Section 3.1 ‘explicitly limits access’ to a preferential treatment to certain enterprises in encouraged industries, such as the OFC industry which is part of the information technology and broadband networks. Consequently, the various documents that were mentioned in Section 3.1 constituted sufficient positive evidence to conclude the specificity of the support and encouragement of the OFC industry by the GOC. Therefore, the claims of the GOC and Connect Com were rejected.

(112)

Furthermore, according to the GOC, internet access networks and broadband infrastructure are general infrastructure. The GOC made reference to the interpretation of ‘general infrastructure’ by the Panel in ‘EC and certain Member States – Large Civil Aircraft’as ‘infrastructure that is not provided to or for the advantage of only a single entity or limited group of entities, but rather is available to all or nearly all entities’. The GOC further argued that the Appellate Body in ‘US – Softwood Lumber IV’ confirmed that ‘only explicit exception to the general principle that the provision of “goods” by a government will result in a financial contribution is when those goods are provided in the form of “general infrastructure.”‘

(113)

In this respect, the Commission pointed out that the interpretation of ‘general infrastructure’ to which the GOC referred relates to the definition of provision of goods by a government in the form of general infrastructure. This interpretation does not relate to the specificity analysis of a subsidy programme. Moreover, the object of this investigation is not the provision of optical fiber cable by a government, which GOC claimed to be ‘general infrastructure’, but rather all the countervailing subsidies granted to the exporting producers of OFC, which in turn export this OFC to telecom operators in the Union. Therefore, the Commission considered the claim as unfounded and irrelevant for the assessment of the encouragement of the OFC industry by the GOC and therefore rejected it.

(114)

Following final disclosure, Connect Com claimed that the general funding for the expansion of the fibre optical network does not represent a specific subsidy for OFC and referred to recital (749) below according to which, OFC do not make up more than 5 % of the total volume of optical fibre network.

(115)

In this respect, the Commission stressed that recital (749) reads as follows: ‘the investigation established that OFC represents only a minor share of the total rollout cost of digital networks projects - in the case of 5G being much less than 5 %’. First, this statement refers to the cost of production and not to the volume. Second, the fact that OFC might represent a minor share of the total rollout of the network does not invalidate the fact that OFC is a key and indispensable product for the deployment of such network. As explained at recitals (80) and (111), OFC is an integral component of the last-generation high-speed broadband networks based on this technology, which therefore would not be able to function without it. Subsidies to this key component are thus by definition specific and instrumental for the successful functioning of the whole optical fibre network. Therefore, the claim was rejected.

(116)

Furthermore, the Temporary Provisions on Promoting Industrial Structure Adjustment (Decision No 40 from 2005 of the State Council) (‘Decision No 40’), Chapter III refers to ‘The Guiding Catalogue for Industry Restructuring’ which is composed of three kinds of contents, namely encouraged project contents, limited projects content and eliminated projects content. According to Article XVII of the Decision, if ‘the investment project belongs to the encouragement content it shall be examined and approved and put on records according to the relevant national regulations on investment; all financial institutions shall provide credit support according to the credit principles; the self-using equipment imported in the total amount of investment, with the exception of commodities in the Non-exempt Imported Commodities Content of Domestic Invested Projects (amended in 2000) issued by the Ministry of Finance, can be exempt from import duty and import links value-added tax, unless there are new regulations on the non-exempt investment projects content. Other favorite policies on the encouraged industrial projects shall be implemented according to relevant national Regulations’.

(117)

Consequently, Decision No 40 read together with the Guiding Catalogue for Industry Restructuring provides for specific treatment of certain projects within certain encouraged industries.

(118)

The Guiding Catalogue for Industry Restructuring (2011 Version)(2013 Amendment) (36) and the Guiding Catalogue for Industry Restructuring (2019 Version) (37) approved by Decree of the National Development and Reform Commission of the People’s Republic of China No 29 of 27 August 2019, which entered into force on 1 January 2020, list under ‘Category I Encouragement’:

‘XXVIII.   Information Industry

[…]

[…]

(119)

Therefore, the Guiding Catalogue for Industry Restructuring includes under ‘information industry’ specific projects related to the OFC industry as encouraged.

(120)

The GOC claimed that Decision No 40 is not mandatory or legally binding, but instead is merely a guidance document. In addition, according to the GOC, Article V of Decision No 40, which refers to ‘[s]trengthen the construction of information infrastructure including broadband communication’, clearly concerns only the improvement of infrastructure and does not mention OFC. Thus, the GOC argued that this document could not have provided support or encouragement to the OFC industry.

(121)

First, the Commission disagreed that Decision No 40 has no mandatory effect. Indeed, Decision No 40 lays down the temporary regulations promoting the industrial restructuring and it refers to ‘The Guiding Catalogue for Industry Restructuring’, which defines three kinds of content: encouraged projects content, limited projects content and eliminated projects content. Article XVII of Decision No 40 establishes the treatment of investment projects belonging to the encouraged content in a mandatory manner, e.g. ‘all financial institutions shall provide credit support according to the credit principles’ and ‘other favourite policies on the encouraged industrial projects shall be implemented according to relevant national Regulations’. Furthermore, Article XXI sets that ‘the relevant preferential policies implemented according to The Content of Industries, Products and Technologies Currently Especially Encouraged by the State (amended in 2000) shall be adjusted to be implemented according to the encouragement content of The Guiding Catalogue for Industry Restructuring’. Therefore, Decision No 40 has a mandatory effect in this respect.

(122)

Second, Article V of Decision No 40, which belongs to Chapter II ‘Orientation and Priorities of Industrial Restructuring’, sets as priority to strengthen the ‘construction of information infrastructure including broadband communication’ and as demonstrated in recital (80) and further explained in recital (111), OFC is a key and indispensable component of such infrastructure. As concluded by the Commission in recital (111), if the building of the broadband infrastructure is encouraged by the GOC, key products which are indispensable for the building of such infrastructure and form an integral part of it are also considered encouraged by the GOC. Furthermore, Article XIV of Decision No 40, which belongs to Chapter III ‘The Guiding Catalogue of the Industrial Restructuring’, states that: ‘the encouragement content mainly includes the key technologies, equipment and products that may promote the social and economic development, that are beneficial for saving the resources, protecting the environment and optimizing and upgrading the industrial structure and that need to be encouraged and supported by relevant policies and measures’. As already pointed out in recital (118), information industry and in particular key input materials for the production of OFC such as single-mode fibre and optical fibre preforms as well as upstream products such as optical fibre transmission systems and optical fibre communication systems are listed as encouraged content. Furthermore, OFC is key equipment for the deployment of ‘information infrastructure including broadband communication’, which is encouraged by the GOC. Therefore, the combined reading of the above provisions shows that OFC is an encouraged product, on the one side because it is an indispensable component of an encouraged infrastructure and on the other side, because its core input materials, which determine the added value of OFC, are also encouraged by the GOC. Therefore, the claim was rejected.

(123)

Not only plans and strategies on national level target at supporting the OFC industry. On provincial level so called National High Tech Industry Development Zones were established. One of them is the East Lake New Technology Industry Development Zone. Those zones are intended to, as set out in Section I.2 of the 13th Five Year Plan on National High Tech Industry Development Zones, provide a regional platform in order to implement in-depth national strategies such as ‘Internet +’ and ‘Made in China 2025’ (38). Companies and enterprises that are located in one of those zones and qualify as an entity conducting business that falls under the scope of the respective strategies enjoy beneficial treatments. As can be seen in the document concerning ‘Preferential policies of the National High-tech Industrial Development Zone’ (39), a general exemption for income tax is awarded within two years from the date of establishment and also afterwards preferential treatments continue with granting a reduced corporate income tax rate, an exemption from export tariffs and other tax benefits.

(124)

The benefits granted for companies operating in high-tech industry located in the National High-tech Industrial Development Zone are not limited to tax benefits but also include direct financial support. As can be seen in the cited document that sets out the preferential policies of the National High-tech Industrial Development Zones it is up to the State to ‘arrange[…] a certain amount of capital construction loans and investment scale each year, and can issue a certain amount of long-term bonds to raise funds from the society’ (40). A more precise description is provided in this document when it states that ‘[t]he financial support of the Chinese government for the high-tech industrial development zone is mainly to give certain start-up funds to the national-level development zones, and to implement some national-level planned projects to enterprises in the development zones. In most development zones in China, the local government mainly supports the development zone by renting land at low prices’.

(125)

Furthermore, the ‘Preferential policies for the national development zones’ refer to the Catalogue of Key High Tech Fields Supported by the State from 2016 that lists the supported key high technology fields. This catalogue clearly mentions under ‘I. Electronic Information’, point 4. ‘Communication technology’‘optical transmission network’ and ‘optical transmission system technology’, which cover optical fibre cables, as high technology fields supported by the State. One of the sampled exporting producers of OFC is located in Wuhan Province and most of the companies in the group are located in the East Lake New Technology Industry Development Zone. Therefore, these companies qualify for beneficial treatments that are granted under the scheme of National High Tech Industry Development Zones.

(126)

This GOC-backed special industry development zone in Wuhan - the East Lake New Technology Industry Development Zone - served as a major production base for OFC. As one of the State Council-approved ‘National High-tech Industry Development Zones’ and a ‘National Indigenous Innovation Demonstration Zone’, it became the PRC’s first optoelectronics industry base (also called ‘China Optics Valley’). OFC producers active in the zone have been benefitting from various forms of incentives and State support.

(127)

With regard to inputs used in the production of OFC, the Commission found that aramid, a chemically obtained synthetic fibre and input in the production of OFC, is categorised as a key product by the GOC in the Guiding Catalogue of key products and services in strategic emerging industries (41). This qualification has put the latter raw material in focus of various GOC policies.

(128)

More broadly, chemical fibres are subject to State regulation and market-management policies not only centrally but also under sub-central planning documents, such as the Zhejiang Province’s Action Plan for Comprehensive Transformation and Upgrade of Traditional Manufacturing industries - where chemical fibres feature as one of the 10 key industries subject to specific policy management (42), or the 13th Five-Year Plan for the Development of the Chemical Industry in Jiangsu Province (2016 – 2020). In the provisions of the latter concerning new chemical materials, the focus is placed notably on supporting the development and industrialisation of high-value added downstream applications such as ‘high performance fibres’, which encompasses fibres used in the production of OFC.

(129)

Following final disclosure, the GOC claimed that various documents cited by the Commission such as the ‘Catalogue of Four Essentials’, the ‘Catalogue of Strategic and Emerging Products and Services of the National Development and Reform Commission 2016’ and the ‘Guiding Catalogue for Industry Restructuring’ do not mention OFC as such but rather refer to input materials. The GOC further stated that the Commission did not carry out a pass-through or pass-back analysis to demonstrate that alleged subsided received by upstream or downstream industries have been passed to the OFC industry.

(130)

With regard to upstream industries, the Commission noted that the sampled exporting producers were vertically integrated and therefore subsidies received by their related suppliers were considered to be passed-through to the exporting producers of OFC. Furthermore, the documents mentioned by the GOC as covering the input materials of OFC, even assuming that they do not also cover at least indirectly or implicitly OFC, quod non, are in any event relevant in together with all other preferential policies and documents by the GOC covered in this section. All the documents in this section cover either optical fibre networks in which OFC is a key component, or its main inputs, hence showing how the OFC sector as a whole is encouraged starting from the upstream production until the downstream output of the product concerned. These documents are also relevant to show specificity of the various subsidy programmes. A pass-through analysis is needed only for subsidies actually granted to raw materials supplied at less than adequate remuneration and used by the exporting producers for the production of the product concerned, and only if the seller and the buyer of these input materials are unrelated. As explained below in Section 3.8.2, raw materials sourced by unrelated suppliers at less than adequate remuneration have not been countervailed in this investigation. Furthermore, as stated above in this recital, the cooperating exporting producers are mainly integrated.

(131)

Considering the above-mentioned plans and programmes, the OFC industry is thus regarded as a key/strategic industry, whose development is actively pursued by the GOC as a policy objective. OFC stands out as a product of paramount importance for the GOC in the building of networks and infrastructure serving entire strata of key connectivity and digital policy areas developed and overseen by the State. On the basis of the policy documents referred to in this section, the Commission concluded that the GOC intervenes in the OFC industry to implement the related policies and interferes with the free play of market forces in the OFC sector, notably by promoting and supporting the sector through various means.

(132)

Following final disclosure, the GOC made some general remarks concerning the Commission’s decision to apply the provisions of Article 28(1) of the basic Regulation with regard to preferential lending, export credit insurance, and input materials.

(133)

The GOC claimed that all of the Commission’s requests for information to which the GOC could not provide responses, were unreasonable, since these requests assumed the existence of legal powers which the GOC did not possess.

(134)

Furthermore, the GOC argued that the Commission did not properly evaluate the facts before it and did not provide a proper explanation of why the facts available reasonably replaced any necessary information that was missing.

(135)

As set out below in recitals (146), (160) and (168), the Commission was of the opinion that the GOC did have the legal power to obtain the requested information, as shareholder or responsible authority of the entities for which the Commission requested the information. The Commission did set out in its communication to the GOC, repeated in sections 3.2.1 to 3.2.3 below, why it had to rely on facts available. The Commission considered publicly available information to be a reasonable replacement for the information that was not provided by the GOC. The Commission therefore rejected the claims of the GOC.

(136)

For administrative convenience, the Commission requested the GOC to forward specific questionnaires to any financial institution that provided loans or export credits to the sampled companies.

(137)

At first, only a reply from EXIM bank was received. The GOC did not respond to the Commission’s request to provide questionnaire replies of all financial institutions that provided loans or export credits to the sampled companies. In the deficiency letter, the Commission therefore repeated its request with regard to the financial institutions with a view to maximising the possibilities to engage them in the investigation by providing the necessary information for the Commission to make findings on the existence and extent of the alleged subsidisation.

(138)

Following the deficiency letter, the GOC indicated that questionnaire responses from the financial institutions that provided loans were not relevant to the investigation, since none of the loans and export credits were granted in accordance with the government plans and projects as alleged in the complaint and set out in the questionnaire.

(139)

The Commission disagreed with this view. First, it is the Commission’s understanding that the information requested from State-owned entities is available to the GOC for all entities where the GOC is the main or major shareholder. In addition, the GOC also has the necessary authority to interact with the financial institutions even when they are not State-owned, since they all fall under the jurisdiction of the Chinese banking regulatory authority.

(140)

In the end, the Commission only received information on corporate structure, governance and ownership from one State-owned bank but not from any of the other financial institutions which had provided loans to the sampled companies. Moreover, the Commission did not receive any verifiable company-specific information from the banks, other than the EXIM Bank.

(141)

Furthermore, although EXIM Bank provided some general explanations on the functioning of their loan approval and risk management systems, it did not provide specific information concerning the assessment of the loans provided to the sampled companies. It argued that it was not in a position to disclose these documents, as they were considered internal and business confidential.

(142)

Therefore, the Commission asked the sampled groups of exporting producers to grant access to company-specific information held by all banks, State-owned and private, from which they received loans. Although the sampled companies gave their agreement to provide access to the bank data pertaining to them, the partially cooperating bank refused to provide the required detailed information.

(143)

Since it has received no information in relation to most of the banks that provided loans to the sampled companies, the Commission considered that it has not received crucial information relevant to this aspect of the investigation.

(144)

Therefore, the Commission informed the GOC that it might have to resort to the use of facts available under Article 28(1) of the basic Regulation when examining the existence and the extent of the alleged subsidisation granted through preferential lending.

(145)

In the reply to the Commission’s letter, the GOC objected to the application of Article 28(1) of the basic Regulation. It argued that the GOC is not obliged to provide the requested information and that the requested information does not constitute necessary information.

(146)

The Commission maintained its position that as the regulatory body, the GOC is the authority to provide answers to the specific questions asked to the financial institutions that provided financing to the sampled exporting producers. As set out in the Commission’s letter, the information requested from State-owned entities is available to the GOC for all entities where the GOC is the main or major shareholder and the GOC has the necessary authority to interact with the financial institutions even when they are not State-owned, since they all fall under the jurisdiction of the Chinese banking regulatory authority.

(147)

Furthermore, the Commission considered the requested information to be crucial to assess the control of the GOC over the conduct of the financial institutions with respect to its lending policies and assessment of risk, where they provided loans to the OFC industry.

(148)

Following final disclosure, the GOC claimed that the information by the Commission with regard to information from financial institutions providing loans or export credits to the sampled companies was not necessary, or even relevant, for the Commission to complete its analysis, since none of the loans at issue were granted pursuant to government plans or other GOC documents.

(149)

The missing information concerned two aspects. First, the information on the ownership and governance structure of the non-cooperating banks was necessary for the Commission to determine whether these banks are public bodies or not. Second, company-specific information from the partially cooperating bank, EXIM Bank, such as the loan approval process and the creditworthiness assessment by the bank for the loans provided to the sampled exporting producers, were necessary in order to determine whether loans were provided at preferential rates to these producers. Such internal documents could only have been provided by the banks and the GOC, since the sampled exporting producers would not have access to them.

(150)

The GOC also argued that the requested information was not available to it. The GOC asserted that it was legally impossible to obtain the requested information, because there is no basis in Chinese law for the GOC to compel financial institutions to divulge such confidential information. By requesting this information, the Commission placed an unreasonable burden on the GOC.

(151)

The Commission noted that consent was requested separately from each company for the loan transactions of each specific bank. The Commission considered that such a specific consent should be sufficient as such to grant access to the records related to the sampled companies. In addition, the partially cooperating bank actually provided an overview of their outstanding loans with the companies, thus showing that they were not restricted in providing information as such on specific transactions. However, none of the banks provided any information related to their own internal assessment of the transactions that had been disclosed.

(152)

Finally, the Commission did not consider that it had imposed an unreasonable burden on the GOC by asking the information on preferential lending. From the start, the Commission had limited its investigation to those financial institutions that had provided loans to the sampled companies. The Commission did identify these financial institutions and the request to forward the questionnaires was provided to the GOC together with the questionnaire to be filled in by the GOC at an early stage of the investigation. This provided ample time for the GOC to comply with the request of the Commission. Therefore, the Commission considered that it had done its utmost best to facilitate its request to the GOC.

(153)

The Commission thus maintained that it had to rely partially on facts available when examining the existence and the extent of the alleged subsidisation granted through preferential lending.

(154)

Following final disclosure, the complainant argued that the Commission did not receive crucial information from the GOC in relation to preferential lending, which has resulted in subsidy margins that likely under-represent the true benefit from preferential loans conferred on the exporting producers.

(155)

The sampled exporting producers did cooperate in the investigation and provided detailed information on the loans they received from the banks. Since the benefit was calculated on the basis of the difference between this information and a benchmark interest rate, the subsidy margin was considered to represent the true benefit conferred on the sampled exporting producers. Therefore, the claim had to be rejected.

(156)

For administrative convenience, the Commission requested the GOC to forward a specific questionnaire to Sinosure.

(157)

In its initial questionnaire reply, the GOC claimed that Sinosure did not provide subsidies to the OFC industry and it considered that the specific questionnaire intended for Sinosure was not relevant. The GOC only provided the annual report of Sinosure.

(158)

Following the deficiency letter, the GOC reiterated its view that Sinosure did not provide subsidies specific to the sampled exporting producers or the OFC industry, although it provided a partial reply to the specific questionnaire. However, neither the GOC nor Sinosure gave any of the supporting documentation requested concerning Sinosure’s corporate governance, such as its Articles of Association, and provided a complete and correct list of the export credits provided to the sampled exporting producers. Furthermore, no specific information about the export credit insurance provided to the OFC industry, the level of its premiums or detailed figures relating to the profitability of its export credit insurance business were received from the GOC or Sinosure.

(159)

In the absence of such information, the Commission considered that it had not received crucial information relevant to this aspect of the investigation.

(160)

It is the Commission’s understanding that the information requested from State-owned entities (be it companies or public/financial institutions) is available to the GOC for all entities where the GOC is the main or major shareholder. This is also the case for Sinosure, which is a fully State-owned entity. Therefore, the Commission informed the GOC that it might have to resort to the use of facts available under Article 28(1) of the basic Regulation when examining the existence and the extent of the alleged subsidisation granted through export credit insurance.

(161)

In the reply to the Commission’s letter, the GOC maintained its position that Sinosure did not provide subsidies specific to the OFC industry and that it follows the market-oriented principle to carry out relevant insurance business and has no specific preferential treatment concerning the OFC industry as requested by any policy documents.

(162)

The information that the GOC provided with regard to Sinosure was incomplete and did not allow the Commission to draw conclusions on crucial parts of the investigation regarding export credit insurance, specifically whether Sinosure is a public body and whether the premiums charged to the sampled companies were market conform.

(163)

Following final disclosure, the GOC argued that all necessary information was submitted to the Commission and, since Sinosure did not provide subsidies that are specific to the OFC industry, the information requested was not relevant in the current investigation.

(164)

As set out in recital (162), the Commission did not receive information from Sinosure to assess the correctness of the claim by the GOC that Sinosure was not a public body and whether the premiums charged by Sinosure were market conform. This information was considered necessary to allow the Commission to draw a conclusion whether the export credit insurance provided by Sinosure established a countervailable subsidy that conferred a benefit to the sampled exporting producers.

(165)

The Commission thus concluded that it had to rely partially on facts available for its findings concerning export credit insurance.

(166)

Following final disclosure, the complainant argued that the Commission did receive incomplete information from the GOC in relation to Sinosure, not allowing to draw conclusions on crucial parts of the investigation regarding export credit insurance. As a result, the subsidy rate calculated for each sampled exporting producer could very likely under-represent the true benefit from export credit insurance conferred on the exporting producers. The complainant considered that the Commission should apply the highest rate found for one exporting producer automatically to the other exporting producer.

(167)

The sampled exporting producers did cooperate in the investigation and provided detailed information on the export credit insurance they received from Sinosure. Since the benefit was calculated on the basis of the difference between this information and an appropriate external benchmark, the subsidy amount was considered to represent the actual benefit conferred on the sampled exporting producers. Therefore, the claim had to be rejected.

(168)

The Commission requested the GOC to forward a specific questionnaire to the top 10 producers and distributors of the input materials used in the production of OFC, as well as to any other suppliers of the materials in question, which have provided inputs to the sampled companies. In its reply to the questionnaire, the GOC claimed that it does not have control over the input materials suppliers to request that they provide the confidential information requested in the questionnaire and that it would be an unreasonable burden for the GOC to coordinate with a very significant number of input materials suppliers of the sampled companies. The Commission found on the basis of publicly available data, however, that the main germanium producers are (partially) State-owned, as set out in Section 3.8.2. Thus, the GOC was in a position to provide the requested information.

(169)

Upon request by the Commission, the GOC provided government plans and notices issued by the Yunnan Province Government affecting the germanium industry. Yet, the GOC refused to comply with the Commission’s request to forward the questionnaire to input suppliers in order to get more detailed information on the ownership structure of the enterprises manufacturing and supplying the input materials in question. Therefore, because of the only partial cooperation of the GOC in respect to input materials used in the production of OFC, the Commission did not obtain the necessary information about the input suppliers.

(170)

Following final disclosure, the GOC claimed that the Commission illegally used facts available with respect to information from input material producers and distributors, arguing that it is unreasonable to expect the GOC to coordinate with uncountable input producers.

(171)

The Commission exceptionally only asked further questions in its deficiency letter to the GOC on one of the main input materials, germanium, for the reasons explained in Section 3.8.2 below. However, the necessary information related to this input material was not fully provided by the GOC.

(172)

This missing information mainly concerned two aspects: first, information on the ownership and governance structure of the non-cooperating producers of input materials. Without such information the Commission could not determine whether these producers are public bodies or not. Second, company-specific information from the non-cooperating producers of input materials, such as e.g. information on the price setting of the inputs provided to the sampled companies. Such information is necessary in the sense of Article 28 of the Basic Regulation in order to determine whether inputs had been provided at less than adequate remuneration to the sampled companies. Furthermore, such information could only be provided by the producers, and could thus not be supplied through the questionnaire replies of the sampled companies.

(173)

Therefore, the Commission thus concluded that it had to rely partially on facts available for its findings concerning the provision of input materials at less than adequate remuneration in accordance with Article 28(1) of the basic Regulation.

(174)

On the basis of the information contained in the complaint, the Notice of Initiation and the replies to the Commission’s questionnaires, the alleged subsidisation through the following subsidies by the GOC were investigated:

(175)

The Commission found that the sampled groups of companies benefitted from a variety of grants programmes such as grants related to technology, innovation and development, asset-related grants, interest discounts on loans, grants supporting exports, grants targeting the development of smart and medium size enterprises, and special grants related to the economic impact of the COVID-19 pandemic. Grants related to technology, innovation and development constituted a significant part of the grants reported by the sampled groups of companies. Therefore, the Commission grouped the grants in two categories: (i) grants related to technology, innovation and development and (ii) other grants.

(176)

Both sampled groups received grants related to research and development (‘R&D’) and industrialisation, technological upgrading and innovation during the investigation period.

—

The 13th Five-year Plan on Technological Innovation;

—

Notice on the Establishment of the 2018 Annual Projects of the Key Special Projects of Optoelectronics and Microelectronics Devices and Integration, Ministry of Science and Technology, Guo Ke Gao Fa Ji Zi (2019) No 49;

—

Notice on Issuing the Establishment of the Broadband Communications and New Network Key Special Projects of National Key R&D Program in 2019, Ministry of Science and Technology, Guo Ke Gao Fa Ji Zi (2020) No 6;

—

Industry support funds and special funds for R&D and industrialization, Dong Ban Fa (2018) No 62;

—

National High-Tech Research and Development Program (863) Management Measures;

—

Development and Industrialization of Convergent Optical Transmission Equipment-13 Hubei Science and Technology Development [2014] No 10 Notice from the Provincial Department of Science and Technology on the release of the 2014 Hubei Province Science and Technology Plan Projects (the first batch);

—

Project Funds for Double Innovation Service Platform;

—

Notice on Issuing the First Batch of Provincial Industrial and Information Industry Transformation and Upgrading Special Fund Indicators in 2019;

—

The Third Research Institute of the Ministry of Public Security Project Research Appropriation Direct funding;

—

Notices on allocating special funds for technical renovation, special funds for industrial revitalization, special funds for technical transformation, and special funds for industrial development;

—

The local programmes Wuhan Municipal Market Supervision Administration allocated high-value cultivation projects; and

—

Document of Nanjing Economic and Technological Development Zone Management Committee, 2018 No 149.

(177)

The Commission found that the majority of the grants related to technological upgrading, renovation or transformation received by the sampled companies explicitly related to research and development. Few grants related to the transformation and innovation of the companies or their manufacturing process and hence indirectly relate to research and development.

(178)

One exporting producer in one of the sampled groups reported 113 grants for the investigation period from which, in value, over 80 % were related to R&D projects. The value of R&D grants of the second exporting producer in the same group represented more than 70 % of the total grants it reported for the investigation period.

(179)

Regarding this group of companies, the Commission further established that the GOC provided grants for R&D industrialisation at various levels in the group. In particular, the GOC awarded special purpose funds to the parent companies, one of which is directly managed by the State-owned Assets Supervision and Administration Commission (‘SASAC’), which have been further allocated to subsidiaries, including one of the exporting producers, for R&D projects.

(180)

One of the exporting producers in the group received a certain amount of funds from its parent companies in the framework of contracts for entrusted R&D services provided to the parent companies. The grants were awarded by the GOC to the parent companies. However, during the RCC, the Commission found that the grants awarded by the GOC were ultimately paid in the form of fees for R&D services to the exporting producer. Moreover, the provisions of the contracts indicated that the R&D results, including all IP rights resulting from these services, belong to both parties and that the right for application remained with the company executing the R&D project, i.e. the exporting producer. The Commission established that the R&D services in question also covered the product concerned. Therefore, on this basis, the Commission considered the funds provided in the form of R&D fees as a grant fully awarded by the GOC to the exporting producer. Related suppliers in the group also received significant grants for R&D projects.

(181)

A large proportion of the companies in this sampled group are located in the Wuhan East Lake New Technology Development Zone and have received R&D funds because they are situated in this zone. This high-tech zone is often referred to as the ‘Optics Valley’ (43) due to the focus on optoelectronics production, including OFC. As described in recitals (123) to (125) above, the Wuhan East Lake New Technology Industry Development Zone served as a major production base for OFC and OFC producers active in the zone have been benefitting from various forms of incentives and State support, including grants. (44)

(182)

Regarding the second sampled group, the Commission established that the value of grants that support R&D or serve transformation or innovation purposes represented around 90 % of the grants received during the investigation period for one of the exporting companies and more than 40 % for the other exporting company.

(183)

The implementation of the plans and programmes described above in recitals (81) to (126) translated into concrete monetary payments. Indeed, among the instruments through which the GOC steers the development of the OFC sector, there are direct State subsidies. The publicly available 2019 Annual report of the exporting producer FTT confirms that the company had RMB 393,8 million of deferred income in governmental subsidies and RMB 45,8 million of governmental subsidies as ‘other income’ at the end of 2019 (45). The publicly available 2019 annual report of the exporting producer ZTT confirms that the company had RMB 150,3 million of deferred income in governmental subsidies and had received RMB 361,1 million of governmental subsidies related to daily company activities at the end of 2019 (46).

(184)

The grant programmes from which the sampled groups of companies benefitted are to a large extent similar in their design. Depending on the purpose, criteria are set upon which enterprises can apply and if the criteria are complied with, the financial support is granted.

(185)

Some of the grants that are provided to the sampled companies have their legal basis in the ‘National High-Tech Research and Development Program’, the so-called ‘863 Management Measures’. These Management Measures once more illustrate the functioning of State planning in the PRC as described above in recital (79). Article 2 states that ‘The National High-Tech Research and Development Plan (863) is a science and technology program with clear national objectives, which is supported by central financial allocations.’ Article 29 of the same document establishes the procedure for the approval of projects that are eligible. It reflects the mechanism described above: after an application, the acceptance and evaluation of it, an expert group will put forward the proposals of the project and the project funding estimates and eventually a joint office will approve and sign the grant.

(186)

There are further legal provisions which form the basis for subsidy programmes in which OFC manufacturers participate.

(187)

One of those legal documents is the ‘Notice on the Establishment of the 2018 Annual Projects of the Key Special Projects of Optoelectronics and Microelectronics Devices and Integration’. This notice states that the responsibility for the coordination and monitoring of the implementation of the projects lies with so-called Lead Units of the projects, which are selected companies benefitting from the respective programme and supervising the other beneficiaries.

(188)

The specific content of the grants that are awarded on the basis of this scheme is specified in its enclosures. For instance, one of the programmes applicable during the IP is described as ‘25G/100G Hybrid Photonic Integrated Chip and Module in Passive Optical Network (PON)’ and amounts to 50.54 million RMB. One of the sampled exporting producers was awarded a grant under this programme. The aim of the GOC to encourage R&D with this grant is evident from its ‘Project Objectives’ that are inter alia described as ‘Research on high-power 25G laser chip technology for passive optical network (PON)’. Passive optical network is a fibre-optic telecommunications technology for delivering broadband network access to end-customers.

(189)

Based on the same legal document, approval is given to a project named ‘25G/50G/100G PON Silicon-based Optoelectronic Chip and Subsystem Project for Optical Access’ with a total project funding of 64.17 million RMB. The objective of the grant leaves no doubt that the grants are supposed to benefit research on optical modulators, optical detectors, photodetectors, and on silicon based multi-channel 100Gb/s PON technology which are all used for optical fibre networks.

(190)

Another project set by this Notice is named ‘Optical Emission and Control Integrated Chip Technology Project in Coherent Optical Communication System’, with a funding of 41.77 million RMB, that is foreseen to be implemented during the period from August 2019 to July 2022. By defining research objectives concerning lasers, laser chips and modulators this grant supports manufacturers in the optical network industry in general and more specifically OFC manufacturers. One of the sampled exporting producers is among the beneficiaries of this programme.

(191)

An additional scheme supporting the internet industry, and in particular OFC manufactures, is stemming from the ‘Notice on Issuing the Establishment of the Broadband Communications and New Network Key Special Projects of National Key R&D Program in 2019’. Based on this Notice, a project called ‘Low Power Consumption, High Integration and High Performance 100G Optical Transmission System Research and Application Demonstration’ was approved and a funding amounting 95.47 million RMB was established. In the description of the project objectives it is expressed that this grant shall help becoming independent from the supply from foreign devices needed for 100G high-speed optical transmission technology and in order to do so it is requested to research and realize high-speed optoelectronic devices and modules and 100G optical transmission platform equipment based on independent chip devices. One of the sampled exporting producers received a R&D grant based on this programme worth 8 360 000 Yuan.

(192)

The grants related to technology, innovation and development, including the grants for R&D projects described in recitals (184) to (191), confer subsidies within the meaning of Article 3(1)(a)(i) and Article 3(2) of the basic Regulation, i.e. a transfer of funds from the GOC to the producers of the product concerned in the form of grants. As mentioned in recital (183) above, most of these funds are booked as government subsidies in the accounts of the sampled exporting producers.

(193)

These subsidies are specific within the meaning of Article 4(2)(a) of the basic Regulation because only companies operating in key areas or technologies, as listed in the guidelines, administrative measures and catalogues that are published on a regular basis, are eligible to receive them and OFC is among the eligible sectors.

(194)

Following final disclosure, the GOC and Connect Com claimed that none of the R&D grants are geared towards the OFC industry and that the Wuhan East Lake New Technology Development Zone does not provide support to companies producing OFC as any alleged support stemming from this Zone relates to upstream or downstream industries of OFC. The GOC further argued that the Commission did not demonstrate that the grants at issue are specific within the meaning of Article 4(2)(a) of the basic Regulation and failed to meet the requirement set out by the Panel in ‘EC – Aircraft’, according to which, specificity requires the establishment of an explicit limitation of the alleged subsidy and that a limitation must ‘distinctly express all that is meant, leaving nothing merely implied or suggested.’ The GOC further claimed that the Commission’s conclusion that these grants are explicitly limited to the OFC industry was manifestly incorrect, referring to the Appellate Body Report in the ‘US-Large Civil Aircraft’ case according to which, the inquiry of whether a subsidy is explicitly limited focuses on ‘not only whether the subsidy was provided to particular recipients identified in the complaint, but focuses also on all enterprises or industries eligible to receive that same subsidy’.

(195)

The Commission has already demonstrated the specificity of grants in recital (193) above. Indeed, only companies operating in key areas or technologies as listed in the guidelines, administrative measures and catalogues are eligible. Furthermore, the cooperating exporting producers provided grants-related documents, such as legal documents and granting notices, which demonstrated that the grants were provided to companies belonging to certain specified industries or sectors and/or involved in specific industrial projects encouraged by the State. Therefore, the Commission reiterated its conclusion that these grants are only available to a clearly specified sub-set of certain enterprises and/or sectors of the economy, certainly a much narrower and specifically defined as the ones at stake in the ‘EC-Aircraft’ dispute. In addition, the Commission found that the eligibility conditions of these grants were not clear and objective and they did not apply automatically; consequently, they did not meet the non-specificity requirements of Article 4(2)(b) of the basic Regulation.

(196)

The Commission disagreed with the statement of the GOC that the Wuhan East Lake New Technology development Zone did not provide support to companies producing OFC and that any alleged support stemming from this Zone relates to upstream or downstream industries of OFC. First, the Commission found that one of the exporting producers benefitted from R&D funds granted by the authorities of the Wuhan East Lake New Technology development Zone to its parent company. Second, even if the GOC’s allegation that any alleged support stemming from this Zone relates only to upstream or downstream industries of OFC was true, it does not demonstrate that the related OFC producers did not benefit from such grants. Indeed, the Commission investigated all related companies that supplied input materials to the exporting producers and allocated part of their subsidies, including grants, to the product concerned. Therefore, this claim was considered unfounded.

(197)

In order to establish the benefit during the investigation period, the Commission considered grants received during the investigation period as well as grants received before the investigation period but for which the depreciation period continued during the investigation period. Regarding grants which are not depreciated, the benefit was considered to be the amount received during the investigation period. Concerning project-related grants and asset-related grants, the benefit was considered to be the portion of the total grant amount that was depreciated during the investigation period.

(198)

Regarding the grants received as a remuneration of R&D services described in recital (180), the Commission considered the amounts received as R&D fees during the investigation period and allocated them to the product concerned based on the proportion that the turnover of the product concerned has in the total exporting producer’s turnover.

(199)

Following final disclosure, Connect Com requested the Commission to disclose the amount of the share of grants specifically granted for the production of OFC and allocated to the production of the product concerned for the cooperating exporting producers, claiming it could not exercise effectively its rights of defence.

(200)

The Commission was not able to share such information as it is considered sensitive business information. The company also failed to explain how knowing such an amount would be vital to defend its rights. Therefore, the claim was rejected.

(201)

The Commission considered whether to apply an additional annual commercial interest rate in accordance with section F.a) of the Commission’s Guidelines for the calculation of the amount of subsidy (47). However, such an approach would have involved a variety of complex hypothetical factors for which there was no accurate information available. Therefore, the Commission found it more appropriate to allocate amounts to the investigation period according to the depreciation rates of the R&D projects and assets, in line with the calculation methodology used in previous cases (48).

(202)

As mentioned in recital (175), the Commission found that the two sampled groups of companies also received other grants, such as asset-related grants, interest discounts on loans, grants supporting exports, and grants targeting the development of small and medium size enterprises.

(203)

These grants were awarded to the companies by national, provincial, city, county or district government authorities and all appeared to be specific to the sampled companies, or specific in terms of geographical location or type of industry. The information regarding the legal basis, under which these grants were awarded, was not disclosed by all sampled companies. However, the Commission received from some companies a copy of documents issued by a government authority, which awarded the funds, referred to as ‘the notice’.

(204)

Examples of such other grants are asset-related grants, patent funds, science and technology funds and awards, business development funds, export promotion funds, grants for industry quality increase and efficiency enhancement, municipal commerce support funds, foreign economic and trade development funds and production safety awards.

(205)

Given the large amount of grants that the Commission found in the books of the sampled groups of companies, only a summary of the key findings is presented in this Regulation. Evidence of the existence of numerous grants and the fact that they had been granted by various levels of the GOC was initially provided by the two sampled groups. Detailed findings on these grants were provided to the individual companies in their specific disclosure documents.

(206)

These other grants constitute subsidies within the meaning of Article 3(1)(a)(i) and (2) of the basic Regulation as a transfer of funds from the GOC in the form of grants to the sampled groups of companies took place and a benefit was thereby conferred.

(207)

The sampled groups of companies provided information as to the amount of the grants and the authority that awarded and paid each grant. The companies concerned also mostly booked this income under the heading ‘subsidy income’ in their accounts and had these accounts independently audited. The information on these grants has been taken by the Commission as positive evidence of a subsidy that conferred a benefit.

(208)

These grants are also specific within the meaning of Articles 4(2)(a) and 4(3) of the basic Regulation given that, from the documents provided by the cooperating exporting producers, they appear to be limited to certain companies, certain industries, such as the OFC industry, or specific projects in specific regions. In addition, some of the grants are contingent upon export performance within the meaning of Article 4(4)(a).

(209)

Furthermore, these grants do not meet the non-specificity requirements of Article 4(2)(b) of the basic Regulation, given that the eligibility conditions and the actual selection criteria for enterprises to be eligible are not transparent, not objective and do not apply automatically.

(210)

Following final disclosure, the GOC argued that to the extent that any of the alleged grants are provided by local and/or regional government, they cannot be considered as regionally specific subsidies. The GOC pointed out that a regional subsidy under Article 2.2 of the SCM Agreement cannot be considered to be specific if it is granted by the region itself (i.e. by the regional or local government) (49) and that the Commission needed to show that there is a limitation on access to the grants on the basis of geographical location alone (50).

(211)

In this respect, the Commission pointed out that in recital (208) it concluded that the grants other than grants related to technology, innovation and development, are specific within the meaning of Articles 4(2)(a), 4(3) and 4(4)(a) of the basic Regulation. Most of these grants appeared to be limited to certain companies operating in certain industries, such as the OFC industry. Only certain grants appeared to relate to specific projects in specific regions. The fact that these grants were awarded to the companies by national, provincial, city, county or district government authorities does not mean that these grants do not have their legal basis at national level and did not concern specific projects in specific regions. The GOC did not provide any concrete evidence that these grants are not specific (for instance, that the grants were provided to all companies within the jurisdiction of the local entity, acting as the granting authority). Consequently, the Commission reiterated that on the basis of the evidence at its disposal it concluded that these grants do not meet the non-specificity requirements of Article 4(2)(b) of the basic Regulation and are specific under Articles 4(2)(a), 4(3) and 4(4)(a) of the basic Regulation and therefore it rejected the claim of the GOC.

(212)

Following final disclosure, Connect Com claimed that a subsidy is only specific if it related directly to the OFC industry and not if it concerns a number of industries, ‘such’ as OFC production as stated by the Commission in recital (208).

(213)

In this respect, the Commission clarified that Article 4(2) of the basic Regulation provides that ‘in order to determine whether a subsidy is specific to an enterprise or industry or group of enterprises or industries (‘certain enterprises’) within the jurisdiction of the granting authority, the following shall apply (…)’. It results from the wording of this provision that specificity can refer also to a ‘group of enterprises or industries’. Therefore, the Commission rejected the claim.

(214)

Connect Com also claimed that the Commission ignored Article 4(2)(b) of the basic Regulation, according to which specificity shall not exist where the granting authority establishes objective criteria governing the eligibility for and the amount of a subsidy.

(215)

With this regard, the Commission explained that, as pointed out in recitals (195) and (209), these grants do not meet the non-specificity requirements of Article 4(2)(b) of the basic Regulation, given that the eligibility conditions and the actual selection criteria for enterprises to be eligible are not transparent, not objective and do not apply automatically. Therefore, the claim was rejected.

(216)

The Commission calculated the benefit in accordance with the methodology described in recital (197) above.

(217)

The subsidy rates established with regard to all grants during the investigation period for the sampled exporting producers were as follows:

Grants

(218)

According to the information provided by the two sampled groups of exporting producers, 32 financial institutions located within the PRC had provided financing to them. Of these 32 financial institutions, 25 were State-owned. The remaining financial institutions were either privately owned or the Commission was not able to determine whether they were State-owned or privately owned. However, only one State-owned bank filled in the specific questionnaire, despite a request to the GOC that covered all financial institutions which had provided loans to the sampled companies.

(219)

The Commission ascertained whether the State-owned banks were acting as public bodies within the meaning of Articles 3 and 2(b) of the basic Regulation. Interpreting the basic Regulation in line with the EU’s WTO obligations, the applicable test to establish that a State-owned undertaking is a public body is as follows (51): ‘What matters is whether an entity is vested with authority to exercise governmental functions, rather than how that is achieved. There are many different ways in which government in the narrow sense could provide entities with authority. Accordingly, different types of evidence may be relevant to showing that such authority has been bestowed on a particular entity. Evidence that an entity is, in fact, exercising governmental functions may serve as evidence that it possesses or has been vested with governmental authority, particularly where such evidence points to a sustained and systematic practice. It follows, in our view, that evidence that a government exercises meaningful control over an entity and its conduct may serve, in certain circumstances, as evidence that the relevant entity possesses governmental authority and exercises such authority in the performance of governmental functions. We stress, however, that, apart from an express delegation of authority in a legal instrument, the existence of mere formal links between an entity and government in the narrow sense is unlikely to suffice to establish the necessary possession of governmental authority. Thus, for example, the mere fact that a government is the majority shareholder of an entity does not demonstrate that the government exercises meaningful control over the conduct of that entity, much less that the government has bestowed it with governmental authority. In some instances, however, where the evidence shows that the formal indicia of government control are manifold, and there is also evidence that such control has been exercised in a meaningful way, then such evidence may permit an inference that the entity concerned is exercising governmental authority.’

(220)

The Commission sought information about State ownership as well as formal indicia of government control in the State-owned banks. It also analysed whether control had been exercised in a meaningful way. For this purpose, the Commission had to partially rely on facts available due to the refusal of the GOC and the State-owned banks to provide evidence on the decision making process that had led to the preferential lending, as set out in recitals (136) to (153) above.

(221)

In order to carry out this analysis, the Commission first examined information from the State-owned bank that had filled in the specific questionnaire.

(222)

Only one State-owned bank, namely EXIM, provided a questionnaire reply.

(223)

Based on the information received in the questionnaire reply, the Commission established that the GOC held, either directly or indirectly, more than 50 % of the shares in this financial institution.

(224)

Concerning the formal indicia of government control of the cooperating State-owned bank, the Commission qualified it as a ‘key State-owned financial institution’. In particular, the notice ‘Interim Regulations on the Board of Supervisors in Key State-owned Financial Institutions’ (52) states that: ‘The key State-owned financial institutions mentioned in these Regulations refer to State-owned policy banks, commercial banks, financial assets management companies, securities companies, insurance companies, etc. (hereinafter referred to as State-owned financial institutions), to which the State Council dispatches boards of supervisors’.

(225)

The Board of Supervisors of the key State-owned financial institutions is appointed according to the ‘Interim Regulations of Board of Supervisors of Key State-owned Financial Institutions’. Based on Articles 3 and 5 of these Interim Regulations, the Commission established that Members of the Board of Supervisors are dispatched by and accountable to the State Council, thus illustrating the institutional control of the State on the cooperating State-owned bank’s business activities.

(226)

In addition to these generally applicable indicia, the Commission found the following with respect to EXIM. EXIM was formed and operates in accordance with ‘The Notice of Establishing Export-Import Bank of China’ issued by the State Council, as well as the Articles of Association of EXIM. According to its Articles of Association, the State directly nominates the management of EXIM. The Board of Supervisors is appointed by the State Council in accordance with the ‘Interim Regulations on the Boards of Supervisors in Key State-owned Financial Institutions’ and other laws and regulations, and it is responsible to the State Council.

(227)

The Articles of Association also mention that the Party Committee of EXIM plays a leading and political core role to ensure that policies and major deployment of the Party and the State are implemented by EXIM. The Party’s leadership is integrated into all aspects of corporate governance.

(228)

The Articles of Association also state that EXIM is dedicated to supporting the development of foreign trade and economic cooperation, cross-border investment, the One Belt One Road Initiative, cooperation in international capacity and equipment manufacturing. Its scope of business includes short-term, medium-term and long-term loans as approved and in line with the State’s foreign trade and ‘going out’ policies, such as export credit, import credit, foreign contracted engineering loans, overseas investment loans, Chinese government foreign aid loans and export buyer loans.

(229)

Furthermore, in its annual report of 2019, EXIM Bank stated that over that it fully implemented all major policies and decisions made by the CPC Central Committee and the State Council.

(230)

The Commission also found that State-owned financial institutions have changed their Articles of Associations in 2017 to increase the role of the China Communist Party (‘CCP’) at the highest decision-making level of the banks (53).

(231)

These new Articles of Association stipulate that:

(232)

The Commission further sought information about whether the GOC exercised meaningful control over the conduct of EXIM bank with respect to its lending policies and assessment of risk, where they provided loans to the OFC industry. The following regulatory documents have been taken into account in this respect:

(233)

Reviewing these regulatory documents, the Commission found that financial institutions in the PRC are operating in a general legal environment that directs them to align themselves with the GOC’s industrial policy objectives when taking financial decisions, for the following reasons.

(234)

With respect to EXIM Bank, its public policy mandate is established in the notice of establishing EXIM Bank as well as in its Articles of Association.

(235)

At the general level, Article 34 of the Bank law, which applies to all financial institutions operating in China, provides that ‘commercial banks shall conduct their business of lending in accordance with the needs of the national economic and social development and under the guidance of the industrial policies of the State’. Although Article 4 of the Bank Law states that, ‘commercial banks shall, pursuant to law, conduct business operations without interference from any unit or individual. Commercial banks shall independently assume civil liability with their entire legal person property’, the investigation showed that Article 4 of the Bank law is applied subject to Article 34 of the Bank law, i.e. where the State establishes a public policy the banks implement it and follow State instructions.

(236)

In addition, Article 15 of the General Rules on Loans provides that ‘In accordance with the State’s policy, relevant departments may subsidize interests on loans, with a view to promoting the growth of certain industries and economic development in some areas’.

(237)

Similarly, Decision No 40 instructs all financial institutions to provide credit support specifically to ‘encouraged’ projects. As already explained in Section 3.1 and more specifically in recitals (81) and (86), projects of the OFC industry belong to the ‘encouraged’ category. Decision No 40 hence confirms the previous finding with respect to the Bank law that banks exercise governmental authority in the form of preferential credit operations. The Commission also found that the CBIRC has far-reaching approval authority over all aspects of the management of all financial institutions established in the PRC (including privately owned and foreign owned financial institutions), such as (54):

(238)

The Bank law is legally binding. The mandatory nature of the Five-Year Plans and of Decision No 40 has been established above in Section 3.1. The mandatory nature of the CBIRC regulatory documents derives from its powers as the banking regulatory authority. The mandatory nature of other documents is demonstrated by the supervision and evaluation clauses, which they contain.

(239)

Decision No 40 of the State Council instructs all financial institutions to provide credit support only to encouraged projects and promises the implementation of ‘other preferential policies on the encouraged projects’. On this basis, banks are required to provide credit support to the OFC industry as an encouraged industry.

(240)

Therefore, the Commission concluded that the GOC has created a normative framework that had to be adhered to by the managers and supervisors of the cooperating State-owned bank, who are appointed by the GOC and accountable to the GOC. Therefore, the GOC relied on this normative framework in order to exercise control in a meaningful way over the conduct of the cooperating State-owned bank whenever it was providing loans to the OFC industry.

(241)

The Commission also sought concrete proof of the exercise of control in a meaningful way based on concrete loans provided to the sampled exporting producers. In its questionnaire reply, the partially cooperating State-owned bank explained that it uses sophisticated credit risk assessment policies and models when granting the loans at issue. EXIM bank further explained that there is no policy difference regarding the industry in which the borrower operates, the credit situation and capital status, etc.; nevertheless, such factors impact the credit rating assessment and the cost of the risk of the borrower. It may refer to relevant plans and policies in providing loans; however, in determining individual loan projects it applies a market-based assessment.

(242)

As already indicated in recital (141) above, the partially cooperating State-owned bank refused to provide concrete examples of its credit risk assessment relating to the sampled companies on the ground that the information requested is internal of the bank and contains business confidential information that is not permitted to be disclosed even though the Commission had a written consent from the sampled companies waiving their confidentiality rights.

(243)

In the absence of concrete evidence of creditworthiness assessments, the Commission therefore examined the overall legal environment as set out above in recitals (232) to (239), in combination with the behaviour of the cooperating State-owned bank regarding loans provided to the sampled companies. This behaviour contrasted with its official stance as in practice it was not acting based on thorough market-based risk assessments.

(244)

In the course of the investigation, the Commission found that loans were provided to the two sampled groups of exporting producers at interest rates below or close to the People’s Bank of China (PBOC) Loan Benchmark Rate and below the Loan Prime Rate as announced by the National Interbank Funding Center (NIFC) that was introduced on 20 August 2019 (55), regardless of the companies’ financial and credit risk situation. Hence, the loans were provided below market rates when compared to the rate corresponding to the risk profile of the sampled exporting producers.

(245)

Following final disclosure, the GOC claimed that the Commission did not demonstrate that the cooperating State-owned bank, namely EXIM bank, is a public body and that the GOC exercised meaningful control over EXIM bank. The GOC stressed that the ‘ownership and formal indicia of control’ are not sufficient to demonstrate the existence of a public body and that the Commission did not demonstrate the lack of independence of the management of EXIM bank by arguing that the GOC exercises control over EXIM bank only in supervising the appointment of the management of the bank and its board.

(246)

The GOC further claimed that the financial institutions in question are not performing any function that could be considered governmental in nature and the GOC has not exercised meaningful control over EXIM bank. Although Article 34 of the Chinese Bank Law requires that commercial banks act ‘under the guidance of the industrial policies’ of the GOC, nowhere in the provision there is a stipulation that requires the banks to act in a certain manner and according to the GOC this provision should be considered a guiding principle for Chinese banks. The GOC also stated that the Chinese Bank Law explicitly prohibits the GOC from exercising any form of control over the decisions of commercial banks. In this respect, the GOC invoked Articles 4 and 5 of the Chinese Bank Law, which respectively provide that commercial banks shall ‘make their own decisions’ and operate ‘without interference from any unit or individual’. The GOC further stressed that Article 41 of the Chinese Bank Law provides that ‘no entity or individual may coerce a commercial bank into granting loans or providing a guarantee’. Furthermore, the GOC claimed that Article 15 of the General Rules on loans as well as Decision No 40 are not mandatory but only of a guidance nature. Finally, the GOC disagreed with the assertion that EXIM bank provided loans at below market rates as it follows internationally accepted standards for risk assessment and loan disbursement and it operates independently from the GOC.

(247)

The Commission disagreed with the allegations of the GOC. The Commission did not reply only on ‘ownership and formal indicia of control’ in order to qualify the cooperating State-owned EXIM bank as a public body but also demonstrated that the GOC exercised meaningful control over the bank for the following reasons.

(248)

As explained in recital (238) above, the Commission considered that the Chinese Bank law and Decision No 40 are of a mandatory nature. Furthermore, the findings of this investigation as well as the Commission’s findings in previous investigations concerning the same subsidy programme (56) did not support the claim that banks do not take government policy and plans into account when making lending decisions. For example, the Commission found that the exporting producers benefited from preferential lending at below-market interest rates. One of the exporting producers befitted from preferential lending by the China Development Bank Fund, which as described in recital (285) below is a policy-oriented investment organisation mainly supporting ‘projects in key sectors recognised by the State’.

(249)

The investigation showed that Article 15 of the General Rules on Loans was actually applied in practice, and that Articles 4, 5 and 41 of the Bank law were applicable subject to Article 34 of the Bank Law, i.e. where the State establishes a public policy the banks implement it and follow State instructions. In fact, while Articles 4 and 5 of the Bank Law are part of Chapter I, which sets the general provisions, Article 34 is part of Chapter IV, which establishes the basic rules governing loans. The wording of Article 34: ‘commercial banks carry out their loan business upon the needs of national economy and the social development and under the guidance of the State industrial policies’, demonstrates that this provision is not of a guiding nature but has rather a mandatory character and provides a clear instruction to banks to take into account the State industrial policies when carrying out their loan business. The Commission also noted that the Decision No 40 of the State Council instructs all financial institutions to provide credit support only to encouraged projects and promises the implementation of ‘other preferential policies on the encouraged projects’. While Article 17 of the same Decision requires banks to respect credit principles, the Commission could not establish during the investigation that this was done in practice. To the contrary, loans were provided to the exporting producers irrespective of their financial situation and creditworthiness.

(250)

Moreover, as concerns specifically EXIM Bank, it is undisputable that this is a policy bank directly pursuing government policies by its own admission. As explained on its website, (57) EXIM is a State-funded and State-owned policy bank directly under the leadership of the State Council and dedicated to supporting inter alia China’s foreign trade and implementing the ‘going global’ strategy.

(251)

On that basis, the Commission concluded that the GOC has created a normative framework with respect to lending to encouraged industries that had to be adhered to by the managers and supervisors of the bank, which are appointed by the GOC and accountable to the GOC. This normative framework did not leave any margin of manoeuvre to the managers and supervisors of the bank as to whether to follow this framework or not with respect to the sampled exporting producers, thus putting the management of that bank in a position of dependence. Therefore, the GOC relied on the normative framework in order to exercise control in a meaningful way over the conduct of the cooperating State-owned bank whenever it was providing loans to the OFC industry.

(252)

As explained in recital (241), the Commission sought proof of the exercise of control in a meaningful way based on concrete loans. However, the cooperating State-owned bank did not provide certain necessary information, including its specific credit risk assessment related to the sampled companies. In the absence of concrete evidence of such credit risk assessments, the Commission examined the overall legal environment applicable to lending to encouraged industries such as the OFC industry in combination with the behaviour of the cooperating State-owned bank and established that the bank was not acting based on thorough market-based credit risk assessments. Furthermore, as explained in recital (244), loans were provided to the two sampled groups of exporting producers at interest rates below or close to the risk-free PBOC Benchmark Interest Rates and the Loan Prime Rate regardless of their financial and credit risk situation. Therefore, considering the risk profile of the sampled exporting producers described in Section 3.5.3.3 below and that, according to the risk analysis performed by the Commission, the exporting producers should have received a BB credit rating and should thus have paid interest rates significantly above the risk-free rate, the Commission concluded that the loans at issue were provided below market rates.

(253)

The Commission therefore concluded that the GOC has exercised meaningful control over the conduct of the cooperating State-owned bank with respect to its lending policies and assessment of risk concerning the OFC industry.

(254)

The Commission established that the partially cooperating State-owned bank implemented the legal framework set out above in the exercise of governmental functions with respect to the OFC sector. Therefore, it was acting as public body in the sense of Article 2(b) of the basic Regulation read in conjunction with Article 3(1)(a)(i) of the basic Regulation and in accordance with the relevant WTO case-law.

(255)

As set out in recital (218) above, none of the other State-owned financial institutions, which provided loans to the sampled companies, replied to the specific questionnaire. The GOC provided solely some information on the ownership of a number of banks, but not on their governance structure, risk assessment or examples relating to specific loans to the OFC industry.

(256)

Therefore, in line with the conclusions reached in Section 3.2.1, the Commission decided to use facts available to determine whether those State-owned financial institutions qualify as public bodies.

(257)

The GOC provided that the following banks, which had provided loans to the sampled groups of exporting producers in the investigation at hand, were partially or fully owned by the State itself or by State-held legal persons: Agricultural Bank of China, Bank of China, Bank of Communications, Bank of Jiangsu, Bank of Kunlun, Bank of Nanjing, Bank of Ningbo, China CITIC Bank China Development Bank, China Construction Bank, China Everbright Bank, China Guangfa Bank, China Merchants Bank, China Minsheng Bank, Hankou Bank, Industrial Bank, Industrial and Commercial Bank of China (ICBC), Ping An Bank, Postal Savings Bank, Shanghai Pudong Development Bank, and Zheshang Bank.

(258)

Using publicly available information, such as the website, annual reports, information available in bank directories or on the Internet, the Commission found that the following financial institutions that had provided loans to the two sampled groups of exporting producers were partially or fully owned by the State itself or by State-held legal persons:

(259)

The Commission further established, in the absence of specific information from the financial institutions at issue indicating otherwise, the GOC’s ownership and control based on formal indicia for the same reasons as set out above in point (1). In particular, based on facts available, managers and supervisors in the non-cooperating State-owned financial institutions appear to be appointed by the GOC and be accountable to the GOC in the same manner as in the cooperating State-owned bank.

(260)

With regard to the exercise of control in a meaningful manner, the Commission considered that the findings concerning the cooperating State-owned financial institution could be considered representative also for the non-cooperating State-owned financial institutions. The normative framework analysed in point (1) above applies to them in an identical manner. Absent any indication to the contrary, based on facts available, (58) the lack of concrete evidence of creditworthiness assessments is valid for them in the same manner as for the cooperating State-owned bank.

(261)

Following final disclosure, the GOC claimed the insufficiency of the Commission’s arguments concluding that all State-owned financial institutions other than EXIM bank also constituted public bodies. The GOC argued that the Commission relied on previous anti-subsidy cases and its own conclusions with respect to the cooperating State-owned financial institutions and lacked to perform a case-by-case analysis giving particular relevance to the specific circumstances of each case and with respect to each of the non-cooperating financial institutions. The GOC further argued that the Commission did not provide sufficient proof to determine the existence of meaningful control over the State-owned financial institutions, as its managers and supervisors appear to be appointed by the GOC.

(262)

In this respect, the Commission recalled that in the absence of cooperation from the other State-owned banks, the Commission had to rely on facts available. The Commission concluded that the information from previous investigations, combined with formal indicia of control and the findings of the investigation itself regarding EXIM bank and regarding the actual conduct of the banks towards the exporting producers constituted the best facts available in this case. In any event, the GOC failed to put forward any evidence or argument to rebut the Commission’s findings concerning the fact that the other State-owned banks which provided loans to the sampled companies are public bodies within the meaning of Article 2(b) read in conjunction with Article 3(1)(a)(i) of the basic Regulation. The Commission thus maintained its position.

(263)

In light of the above considerations, the Commission established that all State-owned Chinese financial institutions that provided financing to the two sampled groups of cooperating exporting producers are public bodies within the meaning of Article 2(b) read in conjunction with Article 3(1)(a)(i) of the basic Regulation.

(264)

In addition, even if the State-owned financial institutions were not to be considered as public bodies, the Commission established on the basis of the same information that they would be considered entrusted or directed by the GOC to carry out functions normally vested in the government within the meaning of Article 3(1)(a)(iv) of the basic Regulation for the same reasons, as set out in Section 3.5.1.2 below. Thus, their conduct would be attributed to the GOC in any event.

(265)

The following financial institutions were considered to be privately owned, based on the findings established in previous anti-subsidy investigations (59) and complemented by publicly available information: HSBC, CITI Bank China, Zijin Rural Commercial Bank, Mizuho Bank, Sumitomo Mitsui Banking (China), MUFG Bank, Bohai international Trust Co., Ltd, and Hubei Rural Credit Cooperative. The Commission analysed whether these financial institutions had been entrusted or directed by the GOC to grant subsidies to the OFC sector within the meaning of Article 3(1)(a)(iv) of the basic Regulation.

(266)

According to the WTO Appellate Body, ‘entrustment’ occurs where a government gives responsibility to a private body and ‘direction’ refers to situations where the government exercises its authority over a private body (60). In both cases, the government uses a private body as a proxy to make the financial contribution, and ‘in most cases, one would expect entrustment or direction of a private body to involve some form of threat or inducement’ (61). At the same time, Article 3(1)(a)(iv) does not allow Members to impose countervailing measures to products ‘whenever the government is merely exercising its general regulatory powers’ (62) or where government intervention ‘may or may not have a particular result simply based on the given factual circumstances and the exercise of free choice by the actors in that market’ (63). Rather, entrustment or direction implies ‘a more active role of the government than mere acts of encouragement’ (64).

(267)

The Commission noted that the normative framework concerning the industry mentioned above in recitals (232) to (238) applies to all financial institutions in the PRC, including privately owned financial institutions. To illustrate this, the Bank Law and the various orders of the CBIRC cover all Chinese-funded and foreign-invested banks under the management of the CBIRC.

(268)

Furthermore, the majority of loan contracts with private financial institutions had similar conditions as the contracts with State-owned banks, and the lending rates provided by the private financial institutions were similar to the rates provided by the State-owned financial institutions.

(269)

In the absence of any divergent information received from the private financial institutions, the Commission concluded that, in so far as the OFC industry is concerned, all financial institutions (including private financial institutions) operating in China under the supervision of the CBIRC have been entrusted or directed by the State in the sense of Article 3(1)(a)(iv), first indent of the basic Regulation to pursue governmental policies and provide loans at preferential rates to the OFC industry. (65)

(270)

Following final disclosure, the GOC claimed that the Commission failed to demonstrate entrustment or direction by the GOC, in particular a link between the government and the specific conduct of all financial institutions. The GOC argues that exercising its general regulatory powers by giving a mere guidance or encouragement are not sufficient to show entrustment and direction; there needs to be some form of threat or inducement. According to the GOC, the Bank Law explicitly prohibits the interference by the GOC and the General Rules of Loan and Decision No 40 only provide guidance and are not mandatory or legally binding. In addition, the GOC claimed that the Commission failed to its duty to conduct such an analysis for each entity.

(271)

The Commission disagreed with this view. Since the normative framework explained in recitals (232) to (239), which applies to all banks in China, is legally binding as further confirmed in recitals (248) and (249), it does not amount to a mere encouragement or guidance by the government. The Commission already established in recital (239) above that Decision No 40 instructs all financial institutions to provide credit support only to encouraged projects even though Article 17 of the same Decision also asks the bank to respect credit principles. Furthermore, the Commission established in recital (251) that the GOC relied on this normative framework in order to exercise control in a meaningful way over the financial institutions not leaving them any margin of manoeuvre as to whether to implement it or not. Therefore, there is a clear link between the GOC and the specific conduct of the private banks, which demonstrates entrustment and direction by the GOC.

(272)

In addition, the Commission recalled that in the absence of cooperation from the private banks, it had to rely on facts available. Since there was partial cooperation from only one State-owned bank, the Commission used the information available for this bank, which was proven to be a public body, and compared it with the lending conditions offered by the non-cooperating private banks. Moreover, the RCCs with the sampled companies did not reveal any significant differences between loan conditions or rates provided by the private financial institutions and those provided by State-owned financial institutions. The fact that there was an overlap in rates shows that the private banks also provided loans below market terms in compliance with the normative framework referred to above. Therefore, the GOC’s claim that the Commission failed to its duty to conduct such an analysis for each entity is unfounded.

(273)

Consequently, the Commission confirmed its conclusion that, in so far as the OFC industry is concerned, all financial institutions, including private financial institutions, operating in China have been entrusted or directed by the State in the sense of Article 3(1)(a)(iv), first indent of the basic Regulation to pursue governmental policies and provide loans at preferential rates to the OFC industry.

(274)

In previous anti-subsidy investigations, the Commission already determined that domestic credit ratings awarded to Chinese companies were not reliable, based on a study published by the International Monetary Fund (66), showing a discrepancy between international and Chinese credit ratings, combined with the findings of the investigation concerning the sampled companies. Indeed, according to the IMF, over 90 % of Chinese bonds are rated from AA to AAA by local rating agencies. This is not comparable to other markets, such as the Union or the United States of America (‘US’). For example, less than 2 % of firms enjoy such top-notch ratings in the US market. Chinese credit rating agencies are thus heavily skewed towards the highest end of the rating scale. They have very broad rating scales and tend to pool bonds with significantly different default risks into one broad rating category (67). According to the China bond market insight 2021 by Bloomberg (68), five Chinese local rating agencies dominate the bond market: China Chengxin, Dagong, Lianhe, Shanghai Brilliance, and Golden credit rating, and around 90 % of the bonds are rated AAA by local rating agencies. However, many of the issuers have received a lower S&P global issuer rating of A and BBB (69).

(275)

In addition, foreign rating agencies, such as Standard and Poor’s and Moody’s, typically apply an uplift over the issuer’s baseline credit rating based on an estimate of the firm’s strategic importance to the Chinese Government and the strength of any implicit guarantee when they rate Chinese bonds issued overseas (70).

(276)

The Commission also found further information to complement this analysis. First, the Commission determined that the State can exercise a certain influence over the credit rating market.

(277)

According to the information provided by the GOC, during the investigation period, there were 14 credit rating agencies active on China’s bond market, including 12 domestic rating agencies.

(278)

Second, there is no free entrance on the Chinese credit rating market. It is essentially a closed market, since rating agencies need to be approved by the China Securities Regulatory Commission (‘CSRC’) or the PBOC before they can start operations (71). The PBOC announced mid-2017 that overseas credit rating agencies would be allowed to carry out credit ratings on part of the domestic bond market, under certain conditions. During the investigation period, there were two foreign-owned and two Sino-foreign joint venture credit rating agencies operating on the Chinese market. However, these credit rating agencies follow Chinese rating scales and are thus not exactly comparable with international ratings, as explained in recital (275).

(279)

Finally, a 2017 study performed by the PBOC itself confirms the Commission’s findings, stating in its conclusions that ‘if the investment level of foreign bonds is set to international rating BBB-and above, then the domestic bond investment grade may be rated at AA-level and above, taking into account the difference between the average domestic rating and the international rating of 6 or more notches’ (72).

(280)

In view of the situation described in recitals (274) to (279) above, the Commission concluded that Chinese credit ratings do not provide a reliable estimation of the credit risk of the underlying asset. Those ratings were also distorted by the policy objectives to encourage key strategic industries, such as the OFC industry.

(281)

The Commission established that companies in both sampled groups used various short-term and long-term loans to finance their activities. These loans were mainly used for daily operations, working capital needs, for special projects, investments or to replace other loans. Both groups also used short-term and long-term export credits.

(282)

In the course of the investigation, the Commission found that certain sampled companies contracted loans with the specific purpose to replace loans from other banks. With this practice, companies could rearrange their liabilities and obtain funds in order to repay their previous obligations, which points to problems to repay debt, absent any other reason for it.

(283)

The use of loans with the sole purpose of repaying other ongoing loans is considered as an indication that the company is not capable of honouring its current loan liabilities and thus presents an additional risk related to its short and long-term financing.

(284)

The Commission found that one of the sampled exporting producers received a bank loan from China Development Bank through its parent company. The parent company contracted the loan with the bank within a so-called ‘shareholder loan’ or ‘entrusted loan’ for an R&D project executed by the exporting producer, and channelled the proceeds of the loan to the exporting producer under the same contractual conditions as it was signed with the bank. During the RCC, the company concerned explained that China Development Bank has special funds for projects that can be provided in the form of loans only to centrally owned entities, which are directly under SASAC’s control. However, the loan was directly negotiated between the exporting producer and the bank. In addition, the loan contract specifies that the bank commissions the parent company to grant the ‘entrusted loan’ to the exporting producer for project capital input.

(285)

The Commission further established that the China Development Bank Fund is a policy-oriented investment organisation, which mainly supports ‘projects in key sectors recognised by the State’ through ‘project capital investment, entity investment, shareholders loans and investments in local investment and financing company funds, to fill the gaps in key projects’ (73).

(286)

Taking into account that the proceeds of the loan were used by the sampled exporting producer for its own projects, that the loan was negotiated directly between the sampled exporting producer and the bank, and that the exporting producer had a loan contract with its parent company mirroring the shareholder contract between the parent company and the bank, the Commission considered that the parent company had only the role of an intermediary and agreed with China Development Bank to provide the loan to the exporting producer. Therefore, the Commission included the loan at issue as financing provided by the bank to the exporting producer in question.

(287)

As demonstrated in recitals (232) to (238), several legal documents, which specifically target companies in the sector, direct the financial institutions to provide loans at preferential rates to the OFC industry. These documents demonstrate that the financial institutions only provide preferential financing to a limited number of industries/companies, which comply with the relevant policies of the GOC. The Commission considered that the reference to the OFC industry is sufficiently clear as this industry is identified either by its name or by a reference to the product that it manufactures or the industry group that it belongs to. Furthermore, as explained in recital (286), one of the sampled exporting producers benefitted from loan provided by the China Development Bank Fund, which supports ‘projects in key sectors recognised by the State’. Therefore, the fact that the GOC supports a limited group of encouraged industries, which includes the OFC industry, makes this subsidy specific.

(288)

Following final disclosure, the GOC and the ZTT Group claimed that the loans at issue are not specific. According to the GOC, the Commission did not demonstrate that the legislation under which the financial support is given expressly limits access to the support and none of the documents referred to by the Commission are geared towards the OFC industry, which according to the GOC is not an encouraged industry in the PRC.

(289)

In this respect, the Commission noted that, even though the documents listed in recital (232) and in particular, Decision No 40, the Bank Law and the General Rules on Loans, do not specify encouraged industries to a granular level to include the OFC industry as such, they do refer to the GOC’s industrial policies to support encouraged industries. As concluded in Section 3.1, the OFC industry is an encouraged industry. The combined reading of the documents concerned demonstrated that the GOC instructed financial institutions to take into account the industrial policies of the GOC in their lending business operations and that according to these industrial policies of the GOC, financial institutions are obliged to provide credit support to encouraged projects. Therefore, it results that the GOC expressly supports a limited group of encouraged industries, including the OFC industry. Therefore, this subsidy is specific. The Commission thus maintained its conclusions.

(290)

The Commission therefore concluded that subsidies in the form of preferential lending are not generally available to all industries but are specific within the meaning of Article 4(2)(a) of the basic Regulation.

(291)

The Commission calculated the amount of the countervailable subsidy based on the benefit conferred on the recipients during the investigation period. According to Article 6(b) of the basic Regulation, the benefit conferred on the recipients is the difference between the amount of interest that the company has paid on the preferential loan and the amount that the company would have paid for a comparable commercial loan which the company could have obtained on the market.

(292)

As explained in Sections 3.5.1 and 3.5.2 above, the loans provided by Chinese financial institutions reflect substantial government intervention and do not reflect rates that would normally be found in a functioning market.

(293)

The sampled groups of companies differed in terms of their general financial situation. Each of them benefitted from different types of loans during the investigation period with variances in respect of maturity, collateral, guarantees and other conditions. For those two reasons, each company had an average interest rate based on its own set of loans received.

(294)

The Commission assessed individually the financial situation of each sampled group of exporting producers in order to reflect these particularities. In this respect, the Commission followed the calculation methodology for preferential financing through loans established in the anti-subsidy investigation on hot-rolled flat steel products originating in the PRC, as well as in the anti-subsidy investigations on tyres originating in the PRC and certain woven and/or stitched glass fibre fabrics originating in the PRC (74) and explained in the recitals below. As a result, the Commission calculated the benefit from the preferential financing through loans practices for each sampled group of exporting producers on an individual basis, and allocated such benefit to the product concerned.

(295)

The Commission noted that the exporting producers in the FTT Group were awarded an AAA credit rating by Chinese credit rating agencies, while the credit rating of their related companies ranged between B and AAA. In light of the overall distortions of Chinese credit ratings mentioned in Section 3.5.2, the Commission concluded that these ratings are not reliable.

(296)

As mentioned in recitals (243) to (253) above, the Chinese lending financial institutions did not provide any creditworthiness assessment in this investigation. Therefore, in order to establish the benefit, the Commission had to assess whether the interest rates for the loans accorded to the FTT Group were at market level.

(297)

The exporting producers of the FTT Group presented themselves in a generally profitable financial situation with profit margins ranging between 1 % and 3 % according to their own financial accounts although the profit margins were much below the profit margin generally expected in the OFC industry, which was set at 12,4 % in the separate anti-dumping investigation.

(298)

One of the exporting producers in the FTT Group used short-term and long-term debt to finance its operations. The Commission assessed the short-term liquidity and the long-term solvency situation of the company.

(299)

Regarding short-term liquidity, the Commission used liquidity ratios such as current ratio, quick ratio, cash ratio and cash flow ratio. These ratios measure the company’s ability to pay short-term obligations, including short-term debt. The company presented an average current ratio of 1,1 during the IP. Although the current ratio is slightly above 1, the company’s current assets are just enough to pay the short-term obligations, which is not sufficient to justify a high credit rating, for which a company should present a ratio of at least 2. The quick ratio of the company was 0,8 in 2019 and 0,6 in 2020, while a quick ratio of at least 1 is considered as a reference. In fact, a company that has a quick ratio below 1 may not be able to pay off its current liabilities in the short-term. The cash ratio of the company was on average 0,1 in the IP; therefore, the company had insufficient cash at hand to pay its short-term debt. The company also showed a negative cash flow from operating activities (‘CFO’) in 2019 and 2020. The CFO ratio was - 0,07 in 2019 and - 0,00007 in 2020. A CFO ratio lower than 1 means that the company has not generated enough cash to cover its current liabilities.

(300)

Considering the liquidity indicators described in recital (299), the Commission concluded that the company at issue presented short-term liquidity problems which results in having a high risk debtor profile.

(301)

The Commission based the long-term solvency risk assessment on various solvency rations such as debt ratios and coverage ratios. The solvency ratios measure the company’s ability to meet its long-term debt obligations. They are used by lenders and bond investors when assessing the company’s creditworthiness.

(302)

Debt ratios measure the amount of liabilities, in particular long-term debt. The company had a high Debt-to-Assets ratio of 0,67, which means that 67 % of the assets of the company are financed by debt. The Debt-to-Equity ratio was 1,9 in 2019 and 2,8 in 2020, which points to the fact the company is financing its activity mainly through debt. The higher the Debt-to-Assets and the Debt-to-Equity ratios are, the higher the financial risk of the company is.

(303)

The coverage ratios measure the company’s ability to serve its debt and meet its financial obligations. The company based its assessment on the interest coverage ratio and the CFO-to-Debt ratio. The interest coverage ratio shows the ability of the company to finance interest costs. This ratio was 1,4 in 2019 and 0,6 in 2020. In financial analysis terms, an interest coverage ratio of less than 1,5 indicates that the company has difficulties meeting its interest expenses. The CFO-to-Debt ratio shows the ability of the company to repay its debt with cash generated from operating activities. The average CFO-to-Debt ratio of the company in the IP was – 6 % in 2019 and – 0,006 % in 2020. This means that the company would need 16 years according to the 2019 ratio to repay its total debt with the operating cash flow it generates. The data from 2020 shows an even worse situation. Therefore, there is indication of serious problems of the company to generate enough cash in order to repay is debt.

(304)

Moreover, this company has contracted loans with the sole purpose to repay loans from other banks. As described in recitals (282) and (283), this type of loans is considered as an indication that the company is not capable of honouring its current loan liabilities and thus presents an additional risk related to its short and long-term financing.

(305)

Therefore, considering the liquidity and solvency issues described in recitals (299) to (304), the Commission considered that the company presented a fragile financial situation and a high risk profile for potential lenders and investors.

(306)

The second exporting producer in the group did not have any loans. However, the Commission noted that it financed 35 % of its purchases by bank acceptance drafts, which are, as established in Section 3.5.4.2 below, a preferential short-term financial instrument. The debt of this producer represented on average 61 % of the total assets the IP with a Debt-to-Assets ratio of 0,6 while the average Debt-to-Equity ratio in the IP was 1,6. This means that the company mainly financed its operations through debt, which is a factor of risk.

(307)

Since this company financed its activities mainly through short-term financing, the Commission focused its analysis on the liquidity situation of the company. The company presented, on average in the IP, a current ratio of 0,9, a quick ratio of 0,7, a cash ratio of 0,1 and a CFO ratio of 0,1. These ratios point to liquidity problems as the total current liabilities exceed the total current assets and the company is in a situation where it cannot pay its current liabilities with cash generated by its current assets and operating activities. In terms of financial analysis, it is generally accepted that liquidity ratios below 1 are an indication of liquidity problems, which is considered as a risk by lending institutions.

(308)

Taking into account the serious liquidity and solvency problems that the financial analysis of the two exporting producers in the FTT Group, as described in recitals (298) to (307), pointed out, the Commission considered that the overall financial situation of the FTT Group corresponds to a BB rating, which is the highest rating that does no longer qualify as ‘investment grade’. ‘Investment grade’ means that bonds issued by the company are judged by the rating agency as likely enough to meet payment obligations that banks are allowed to invest in them.

(309)

Based on publicly available data on Bloomberg, the Commission used as a benchmark the premium expected on bonds issued by firms with a BB rating, which was applied to the PBOC Loan Benchmark Rate, or after 20 August 2019 to the Loan Prime Rate as announced by the NIFC (75) in order to determine the market rate.

(310)

That mark-up was determined by calculating the relative spread between the indices of US AA rated corporate bonds to US BB rated corporate bonds based on Bloomberg data for industrial segments. The relative spread thus calculated was then added to the Loan Benchmark Rate published by the PBOC or, after 20 August 2019, to the Loan Prime Rate published by the NIFC, at the date when the loan was granted (76) and for the same duration as the loan in question. This was done individually for each loan provided to the company group.

(311)

As for loans denominated in foreign currencies, the same situation in respect of market distortions and the absence of valid credit ratings applies, because these loans are granted by the same Chinese financial institutions. Therefore, as found before, BB rated corporate bonds in relevant denominations issued during the investigation period were used to determine an appropriate benchmark.

(312)

The benefit was established by applying the benchmark described in recital (310) to the period of loan financing during the investigation period.

(313)

The Commission noted that the ZTT Group was awarded an AA+ rating by a Chinese credit rating agency in 2018. In view of the overall distortions of Chinese credit ratings, mentioned in Section 3.5.2, the Commission concluded that the AA+ credit rating awarded to the ZTT Group is not reliable.

(314)

As mentioned in recitals (243) to (253) above, the lending Chinese financial institutions did not provide any creditworthiness assessment. Hence, in order to establish the benefit, the Commission had to assess whether the interest rates for the loans accorded to the ZTT Group were at market level.

(315)

The exporting producers of the ZTT Group presented themselves in a generally profitable financial situation according to their own financial accounts.

(316)

However, the analysis of one of the exporting producers in the group showed a decrease in the turnover combined with a significant increase in its liabilities since 2018. The Commission noted that the company is altering its financial leverage, expressed as the debt equity ratio (77), increasing its dependency on external financing and limiting the share of wholly owned funds to finance its growth. Furthermore, while the company is in a profitable situation, it should be noted that the profit margin, as well as the return on equity (78), decreased since 2018. Similarly, the Commission established the general use of short-term loans with the purpose to finance working capital for the day-to-day operations, by the two exporting producers as well as by other related companies in the group.

(317)

Analysing ZTT Group from a consolidated approach, the Commission noted that the group issued bonds with the intention to, in addition to other projects, supplement the company’s working capital. By this action, the group recognises its necessity of replenishing working capital to provide sufficient liquidity to the undergoing expansion of the business. Furthermore, during the period 2015 to 2018, ZTT Group’s gross profit rate showed a downward trend and was also below the average of comparable optical fibres producers companies (79). The investigation also established that Zhongtian Technology Group Co., Ltd, the parent company of the exporting producers, issued short term bonds with the purpose of debt repayment. A debt to equity swap was similarly established (80).

(318)

In view of the above, the Commission considered that the overall financial situation of the group corresponds to a BB rating, which is the highest rating that does no longer qualify as ‘investment grade’. ‘Investment grade’ means that bonds issued by the company are judged by the rating agency as likely enough to meet payment obligations that banks are allowed to invest in them.

(319)

The premium expected on bonds issued by firms with this BB rating was then applied to the standard lending rate of the PBOC Loan Benchmark Rate, or after 20 August 2019 to the Loan Prime Rate published by the NIFC, in order to determine the market rate.

(320)

That mark-up was determined by calculating the relative spread between the indices of US AA rated corporate bonds to US BB rated corporate bonds based on Bloomberg data for industrial segments. The relative spread thus calculated was then added to the Loan Benchmark Rate or by the Loan Prime Rate, at the date when the loan was granted and for the same duration as the loan in question. This was done individually for each loan provided to the company group.

(321)

As for loans denominated in foreign currencies, the same situation in respect of market distortions and the absence of valid credit ratings applies, because these loans are granted by the same Chinese financial institutions. Therefore, as found before, BB rated corporate bonds in relevant denominations issued during the investigation period were used to determine an appropriate benchmark.

(322)

Following final disclosure, the GOC claimed that the loans at issue did not confer a benefit within the meaning of Article 3(2) of the basis Regulation and Article 1(1)(b) of the SCM Agreement. The GOC considered that the Commission illegally disregarded the credit rating of the cooperating exporting producers and disagreed with the methodology used by the Commission to establish a benchmark, which is based on a lack of consideration of the credit ratings of the exporting producers. The GOC noted that while the Commission’s findings regarding loans is based, to a significant extent, on its assessment of the supposedly poor financial situation of the companies at issue, the Commission’s assessment in this regard is incorrect, especially with regard to the companies’ revolving loans.

(323)

In this respect, the Commission referred to its findings and conclusions in Section 3.5.2 where it demonstrated that the Chinese credit ratings do not provide a reliable estimation of the credit risk and that these credit ratings are distorted by the policy objectives of the GOC to encourage key strategic industries. Therefore, the claim of the GOC regarding the credit ratings of the cooperating exporting producers is unfounded. In order to establish a credit rating corresponding to the risk profile of the cooperating exporting producers, the Commission performed a financial analysis of the companies concerned in points (1) and (2) above, which pointed to a financial situation of the corresponding to a BB rating. Therefore, the claim of the GOC was rejected.

(324)

The GOC also claimed that the Commission failed to justify why it did not use a comparable loan on the Chinese market and failed to demonstrate on the basis of positive evidence that the market for loans in the PCR is distorted by government intervention. The GOC also claimed that even when resorting to external benchmarks for benefit establishment, the Commission did not make the required adjustments to its proxy benchmark and did not adequately explained how such a proxy approximates a comparable commercial loan available on the market. According to the GOC, the Commission should have taken into account differences that existed in inter alia the size of the loans, the terms of repayment, and considerations regarding whether or not the loans were actually granted and which have an effect on the lending rates.

(325)

In this respect, as explained above, domestic credit ratings awarded to Chinese companies were considered distorted by the policy objectives of the GOC to encourage key strategic industries and therefore unreliable. As a result, the Commission had to look for a benchmark based on undistorted credit ratings. The Commission disagreed with the view of the GOC that it did not make the required adjustments to its proxy benchmark. First, the Commission used the Chinese PBOC Loan Benchmark Rate and the Loan Prime Rate as a starting point for the calculation. Second, the use of the relative spread captures changes in the underlying country-specific market conditions, which are not expressed when following the logic of an absolute spread. The Commission observed that it is not possible to include all factors of the individual risk assessment of a bank into the proxy. However, the Commission’s calculation methodology takes into account parameters of individual loans, such as the start date and the duration of the loan, as well as the variability of the interest rate. The GOC’s claims were thus rejected.

(326)

The GOC objected to the use of the relative spread between AA and BB rated bonds as the mark-up and its addition to the PBOC rates. According to the GOC, the use of a relative spread further distorts the calculation of the benchmark interest rate at which Chinese companies with a BB rating could have obtained a ‘comparable commercial loan on the market’ as the PBOC reference rates in the PRC during the relevant years were much higher than the reference rate in the US. In addition, the GOC stated that publicly available information shows that EU OFC producers with BB rating are issuing bonds at significantly lower rates than those used for Chinese producers.

(327)

The ZTT Group commented that the Commission should have applied the absolute spread between the US AA rate corporate bonds and the US BB rated corporate bonds to the PBOC Loan Benchmark Rate, which would sufficiently factor in the risk exposure between the corporate bonds of different credit ratings. According to this party, the Commission did not explain why it used the relative spread and why it considered that the Benchmark Interest Rate published by the PBOC or the Loan Prime Rate published by NIFC equals to an AA rating interest rate.

(328)

Regarding the comment on the use of the Benchmark Interest Rate published by the PBOC or the Loan Prime Rate published by NIFC as a starting point in the calculation of the benchmark, the Commission pointed out that these rates are considered to be risk-free rates which, in a conservative approach, would be applied to companies having an AA rating.

(329)

The issue of the use of the relative spread instead of the absolute spread was already explained in previous investigations (81).

(330)

First, while the Commission recognised that commercial banks usually use a mark-up expressed in absolute terms, it observed that this practice seems mainly based on practical considerations because the interest rate is ultimately an absolute number. The absolute number is however the translation of a risk assessment that is based on a relative evaluation. The relative evaluation means that the risk of default of a BB-rated company is X % more likely than the risk of default of the government or a risk-free company.

(331)

Second, interest rates reflect not only company-specific risk profiles, but also country- and currency-specific risks. The relative spread thus captures changes in the underlying market conditions, which are not expressed when following the logic of an absolute spread. Often, as in the present case, the country- and currency-specific risk varies over time, and the variations are different for different countries. As a result, the risk-free rates vary significantly over time, and are sometimes lower in the US, sometimes in China. These differences relate to factors such as observed and expected GDP growth, economic sentiment, and inflation levels. Because the risk-free rate varies over time, the same nominal absolute spread can signify a very different assessment of the risk. For example, where the bank estimates the company-specific risk of default at 10 % higher than the risk-free rate (relative estimation), the resulting absolute spread can be between 0,1 % (at a risk-free rate of 1 %) and 1 % (at a risk-free rate of 10 %). From an investor perspective, the relative spread is hence a better measure as it reflects the magnitude of the yield spread and the way it is affected by the base interest-rate level.

(332)

Third, the relative spread is also country-neutral. For instance, where the risk-free rate in the US is lower than the risk-free rate in China, the method will lead to higher absolute mark-ups. On the other hand, where the risk-free rate in China is lower than in the US the method will lead to lower absolute mark-ups.

(333)

The Commission considered the comments of the GOC referring to interest rates applicable to BB-rated companies in the European Union as unfounded since the risk-free rate in the European Union is not the same as the risk-free rate in the PRC and thus it is not possible to compare interest rates in absolute terms.

(334)

The ZTT Group further claimed that even if the relative spread is applicable, it shall be applied to the basis points part in the variable interest rates (usually expressed in a structure of reference rate plus basis points) and that this is the case for loans denominated in foreign currencies, where interest rates are expressed in the form of LIBOR plus basis points. Therefore, the risk exposure of borrowing is duly reflected by the basis points added to LIBOR and by applying the relative spread to LIBOR, the commission calculated a benchmark rate completely disconnected to the company’s credit rating. As regards loans denominated in CNY, the same spread adjustment shall be made only to basis points where the variable rates are expressed in LRP plus basis points.

(335)

In this respect, the Commission considered for loans denominated in foreign currencies a conservative approach by using the LIBOR as risk-free reference interest rate. The basis points added to LIBOR indicate the specific risks of a company. First, only for some loans of sampled exporting producers such differentiation between reference interest rate and basis points was given. Second, these basis points were also considered to be market distorted. Therefore, the Commission considered the risk-free rate increased by the relative spread an appropriate proxy to reflect the additional risk of a BB-rated company, such as the sampled exporting producers.

(336)

The GOC also argued that the benchmark for loans, which is based on the relative spread between corporate bonds, needs to be adjusted downwards in view of the difference between the two financial instruments.

(337)

In this respect, the Commission pointed out that loans and corporate bonds are similar financial debt instruments. In fact, a corporate bond is a kind of a loan used by large entities to raise capital. Both loans and corporate bonds are contracted/issued for a certain period of time and bear an interest/coupon rate. The fact that the financing through a loan is provided by a financial institution and that the financing through a corporate bond is provided by investors, which in most cases are also financial institutions, is irrelevant for the determination of the core characteristics of both instruments. Indeed, both instruments serve to finance business operations, bear the same kind of remuneration and have similar repayment term and conditions. Furthermore, during the investigation, the Commission found out that the corporate bond issued by one of the cooperating exporting producers had a coupon rate and purpose which was very similar to the interest rates and purpose of loans with similar duration, and thus they could be considered interchangeable from the producer’s perspective. On this basis, the Commission rejected the claim of the GOC.

(338)

The Commission established that both sampled groups of exporting producers benefited from preferential financing through loans during the investigation period. In view of the existence of a financial contribution, a benefit to the exporting producers and specificity, the Commission considered preferential financing through loans a countervailable subsidy.

(339)

The subsidy rates established with regard to the preferential financing through loans during the investigation period for the sampled groups of companies amounted to:

Preferential financing: loans

(340)

The purpose of a credit line is to establish a borrowing limit that the company can use at any time to finance its current operations thus making working capital financing flexible and immediately available when needed. Therefore, the Commission considered that in principle, all short-term financing of the sampled companies, such as short-term loans, bank acceptance drafts etc., should be covered by a credit line instrument.

(341)

The Commission established that Chinese financial institutions provided credit lines to both sampled groups in connection with the provision of financing. These consisted of framework agreements, under which the bank allows the sampled companies to use various debt instruments, such as working capital loans, bank acceptance drafts, other forms of trade financing, etc., within a certain maximum amount.

(342)

As mentioned in recital (340) above, all short-term financing should be covered by a credit line. Therefore, the Commission compared the amount of the credit lines available to the cooperating companies during the investigation period with the amount of short-term financing used by these companies during the same period to establish whether all short-term financing was covered by a credit line. In the case where the amount of the short-term financing exceeded the credit line limit, the Commission increased the amount of the existing credit line by the amount actually used by the exporting producers beyond that credit line limit.

(343)

Under normal market circumstances, credit lines would be subject to a so-called ‘arrangement’ or ‘commitment’ fee to compensate for the bank’s costs and risks at the opening of a credit line, as well as to a ‘renewal fee’ charged on a yearly basis for renewing the validity of the credit lines. However, the Commission found that both sampled groups of companies benefited from credit lines provided free of charge. Therefore, a benefit was conferred to both groups of companies within the meaning of Article 6(d) of the basic Regulation.

(344)

As mentioned in recital (116), according to Decision No 40, financial institutions shall provide credit support to encouraged industries.

(345)

The Commission considered that credit lines are a form of a preferential financial support by financial institutions to encouraged industries such as the OFC sector. As specified in Section 3.1 above, the OFC sector is among the encouraged industries and is therefore eligible for all possible financial support.

(346)

Following final disclosure, the GOC claimed that the credit lines allegedly being provided to the OFC industry are not specific and that the Commission failed to demonstrate how the access to the credit lines was explicitly limited to the OFC industry. The GOC stressed that all enterprises in the PRC, regardless of industry type, are equally eligible for obtaining credit lines. This claim was reiterated by the FTT Group.

(347)

In this respect, the Commission noted that the GOC’s assertion that all enterprises in the PRC can benefit from credit lines is inapposite. The GOC failed to demonstrate that companies in the PRC can equally benefit from the preferential conditions observed as regards the OFC industry. Moreover, as credit lines are intrinsically linked to other types of preferential lending such as loans and as they are part of the credit support specifically provided to encouraged industries as explained in recital (239), the specificity analysis as developed in Section 3.5.3.2 above for loans is also applicable to credit lines. As a result, these claims were rejected.

(348)

In accordance with Article 6(d)(ii) of the basic Regulation, the Commission considered the benefit conferred on the recipients to be the difference between the amount that the company has paid as a fee for the opening or the renewal of the credit lines by Chinese financial institutions and the amount that the company would pay for a comparable commercial credit line obtained on the market.

(349)

The appropriate benchmarks for the arrangement fee and for the renewal fee were established at 1,5 % and 1,25 % respectively by reference to publicly available data (82) and benchmarks used in previous investigations (83).

(350)

In principle, the arrangement fee and the renewal fee are payable on a lump sum basis at the time of the opening of a new credit line or the renewal of an existing credit line respectively. However, for calculation purposes, the Commission took into account credit lines which have been opened or renewed before the investigation period but which were available to the sampled groups during the investigation period and the credit lines that were opened or renewed during the investigation period. Then, the Commission calculated the benefit based on the period within the investigation period during which the credit line was available.

(351)

Following final disclosure, the GOC commented that the Commission failed to demonstrate that a benefit was provided through credit lines. The GOC claimed that the Commission has not demonstrated that the financial assistance at issue makes the recipient better off than it would have been, absent that contribution.

(352)

In this respect, as pointed out in recital (343), under normal market circumstances, credit lines are subject to an ‘arrangement’ or ‘commitment’ fee as well as to a ‘renewal fee’ charged on a yearly basis for renewing the validity of the credit lines. Taking into account the fact that the cooperating exporting producers befitted from credit lines free of charge, the benefit consisted in the amount of arrangement and renewal fees that the companies should have paid. The fees savings from which the companies benefitted made them better off from a financial point of view. Therefore, the claim was rejected.

(353)

The FTT Group claimed that the opening of a credit line is not a financial contribution. It stated that credit lines establish only a borrowing limit that a company can use to obtain working capital or financial instruments and that there are no world-wide accepted standards regarding how to arrange the opening credit lines and that there is no evidence that fees are commonly and compulsorily applied by all banks in the world and that the Commission based its assessment and benchmark fee on only one bank, namely HSBC. In addition, the FTT Group argued that the applicable fees are merely bank handling expenses, which are not associated with the risk of opening or renewing a credit line. The GOC also claimed that the Commission erred in its determination of a proper benchmark.

(354)

In this respect, the Commission clarified that it has based its conclusion regarding the application of arrangement and renewal fees as well as regarding the appropriate benchmark on publicly available data. In recital (349), the Commission made reference to findings in previous anti-subsidy cases as well as to the practice of two large internationally operating banks, i.e. HSBC and Barclays Bank (84), in order to establish an appropriate benchmark. Considering the available information, the Commission estimated that the application of an arrangement fee benchmark of 1,5 % and a renewal benchmark fee of 1,25 % was reasonable. The Commission disagreed with the claim of the FTT Group that the applicable fees are merely bank handling expense, which are not associated with the risk of opening or renewing a credit line. According to business practice, a commitment fee is charged by a lender to a borrower to compensate the lender for keeping a credit line open and financial resources available; the fee also secures a lender’s promise to provide the credit line on the agreed terms and compensates the lender for the risks associated with an open credit line (85). Actually, a business credit line operates in the same ways as a personal credit card for which banks always charge fees associated with the use of the credit card and the availability of the given amount of money. Therefore, the claims were rejected.

(355)

The ZTT Group disagreed with the Commission’s statement that having a credit line agreement with a bank is a pre-requisite for obtaining financing from the latter and provided examples of bank in the world that do not require credit lines in order to provide ad-hoc borrowings. According to the ZTT Group, credit lines are framework agreements, under which the bank allows a company to use various debt instruments within a certain maximum credit amount without re-negotiation; however, it does not exclude any stand-alone loans to a company which is assessed and granted on a case-by-case basis without a prior credit line. The ZTT Group also disagreed that all credit lines, especially the ones agreed with large and sophisticated clients, are subject to arrangement or renewal fees. The ZTT Group claimed that the benchmark fees used by the Commission are too high and provided examples of fees charged by Lloyds (up to 1,5 % for arrangement and 1 % for renewal) and HSBC where the exact fee seems to be determined bilaterally/contractually.

(356)

First, as explained in recital (340), the purpose of a credit line is to establish a borrowing limit that the company can use at any time to finance its current operations thus making working capital financing flexible and immediately available when needed. Taking into account the short-term financing practices of the sampled cooperating exporting producers in the form of bank acceptance drafts and working capital short-term loans, for which financial resources needed to be immediately available, as well as the fact that most of the time the companies only had oral credit line arrangements without any written evidence, the Commission considered that all short-term financing of the sampled companies were to be covered by a credit line instrument. This conclusion is applicable only to short-term financing and does not concern long-term financing, which is subject to a case-by-case negotiation. Second, regarding the claim that all credit lines, especially the ones agreed with large and sophisticated clients, are subject to arrangement or renewal fees, the Commission observed that the ZTT Group failed to provide evidence of credit line facilities without a commission attached to them. Third, regarding the benchmark fees used by the Commission, as stated in recital (354), the Commission used findings in previous anti-subsidy cases and publicly available data to conclude that the application of an arrangement fee benchmark of 1,5 % and a renewal benchmark fee of 1,25 % was reasonable. In this respect, the Commission pointed out that for instance Barclays Bank charges a set-up fee of 1,5 % of the arranged overdraft limit, and a renewal fee of 1,5 % for overdrafts over £ 15 000. In this case the renewal fee benchmark used by the Commission is lower. A further search showed that Barkley charges business overdraft fees from 1,6 % up to 2,5 % of the limits for the business bands £ 15 001 - £ 20 000 and £ 20 001 – £ 25 000 (86). Therefore, the Commission reiterated its conclusion that the benchmark fees it has used are reasonable and based on available market data and thus rejected the claim.

(357)

Bank acceptance drafts are a financial product aimed at developing a more active domestic money market by broadening credit facilities. It is a form of short-term financing that might ‘reduce fund cost and enhance capital efficiency’ of the drawer (87). In addition, as stated by the People’s Bank of China on its website, ‘the bank acceptance draft can guarantee the establishment and performance of the contract between the buyer and the seller, as well as promote the capital turnover via the intervention of Bank of China’s credit’ (88). In addition, on its website DBS Bank advertises bank acceptance drafts as a means to ‘improve working capital by deferring payments’ (89).

(358)

Bank acceptance drafts can only be used to settle genuine trade transactions and the drawer must produce sufficient evidence in that respect, e.g. through a purchase/sales agreement, invoice and delivery order etc. Bank acceptance drafts may be used as a standard means of payment in purchase agreements together with other means such as remittance or money order.

(359)

The bank acceptance draft is drawn by the applicant (the drawer, which is also the buyer in the underlying commercial transaction) and accepted by a bank. By accepting the draft, the bank accepts to make an unconditional payment of the amount of money specified in the draft to the payee/bearer on the designated date (the maturity date).

(360)

In general, the bank acceptance contracts contain the list of the transactions covered by the amount of the draft with indication of the payment due date with the supplier and the maturity date of the bank acceptance draft.

(361)

Usually, bank acceptance drafts are issued within the framework of a bank acceptance draft agreement specifying the identity of the bank, suppliers and buyer, the obligations of the bank and the buyer and detailing the value per supplier, the payment due date agreed with the supplier and the maturity date of the bank acceptance draft.

(362)

The Commission established that credit line agreements generally list bank acceptance drafts as possible use of the finance limit along with other short-term financial instruments such as working capital loans.

(363)

Depending on the conditions established by each bank, the drawer might be required to make a small deposit in a dedicated account, make a pledge and pay acceptance commission. In any event, the drawer is obliged to transfer the full amount of the bank acceptance draft to the dedicated account at the latest at the maturity date of the bank acceptance draft.

(364)

Once accepted by the bank, the drawer endorses the bank acceptance draft and transfers it to the payee, who is also the supplier in the underlying commercial transaction, as a payment of the invoice. Consequently, the payment obligation of the buyer (drawer) towards the supplier (payee) is cancelled. A new payment obligation of the buyer is created towards the accepting bank for the same amount (the drawer has the obligation to pay the bank in cash before the maturity of the bank acceptance draft). Therefore, the issuance of a bank acceptance drafts has the effect to replace the obligation of the drawer towards its supplier by an obligation towards the bank.

(365)

The maturity of bank acceptance drafts varies depending on the conditions set by each bank and can go up to 1 year.

(366)

The payee (or bearer) of the bank acceptance draft has three options before the maturity:

(367)

The issuance date of the bank acceptance draft generally corresponds to the payment due date agreed with the supplier. The Commission found that, as far as the sampled companies are concerned, the issuance date was generally on or before the due date of the payment with the supplier and in some cases even few days after the payment due date. The Commission established that the maturity date of the bank acceptance drafts of the sampled companies is from 3 months up to 12 months after the payment due date of the invoice.

(368)

Regarding the accounting treatment of bank acceptance drafts, they are recognized as liabilities to the bank in the accounts of the drawers, i.e. the sampled exporting producers.

(369)

The Credit Reference Center of the People’s Bank of China (‘CRCP’) recognises bank acceptance drafts as ‘unsettled credit’ provided by banks at the same level as loans, letters of credit or trade financing. It should also be noted that the CRCP is fed by the financial institutions, which grant various types of loans, and that such financial institutions have thus recognised bank acceptance drafts as liabilities to them. Furthermore, the bank acceptance agreements collected during the investigation provide that, should the buyer not make the full payment on the expiry date of the bank acceptance drafts, the bank would treat the amount unpaid as an overdue loan to the bank.

(370)

The Commission established that bank acceptance drafts are largely used as a means of payment in commercial transactions as a substitute to a money order thus facilitating the cash turnover and the working capital of the drawer. From a cash point of view, the instrument de facto grants the drawer a deferred due date of payment up to 1 year because the actual cash payment of the transaction amount occurs at the maturity of the bank acceptance draft and not at the moment when the drawer had to pay its supplier. In the absence of such a financial instrument, the drawer would either use its own working capital, which has a cost, or contract a short-term working capital loan with a bank in order to pay its suppliers, which also has a cost. In fact, by paying with bank acceptance draft, the drawer uses the supplied goods or services for a period of 3 months to 1 year without advancing any cash and without bearing any cost.

(371)

Under normal market circumstances, as a financial instrument, bank acceptance drafts would imply a cost of financing for the drawer. The investigation showed that all the sampled companies that used bank acceptance drafts during the investigation period only paid a commission for the acceptance service provided by the bank, which was in general 0,05 % of the face value of the draft. However, none of the sampled companies bore a cost for the financing via bank acceptance drafts by deferring the cash payment of the supply of goods and services. Therefore, the Commission considered that the investigated companies benefitted from financing in the form of bank acceptance drafts for which they did not bear any cost.

(372)

Considering the above, the Commission concluded that the bank acceptance system put in place in the PRC provided all exporting producers a free financing of their current operations, which conferred a countervailable benefit as described in recitals (384) to (388) below, in accordance with Article 3(1)(a)(i) and 3(2) of the basic Regulation.

(373)

The Commission established in a previous investigation (90) that bank acceptance drafts effectively have the same purpose and effects as short-term working capital loans, as they are used by companies to finance their current operations instead of using short-term working capital loans, and that consequently, they should bear a cost equivalent to a short-term working capital loan financing.

(374)

Following final disclosure, the ZTT Group disagreed with the Commission that bank acceptance drafts are a form of short-term financing and that they act rather as a bank guarantee. According to this party, a bank acceptance draft is an instrument by which the bank takes the obligation to pay a party rather than the original debtor, who still remains liable to pay the bank. The purpose of such instrument is not to act as short-term financing but as to facilitate the sale of goods. The ZTT Group argued that by agreeing to the payment via bank acceptance drafts, the parties to the transactions consented to the payment term of settling the debt between them, amounting to the seller to agree to a credit term until the draft maturity against a bank guaranteed payment and the buyer undertaking the obligation to make the same value available to the bank at the maturity date at the latest.

(375)

The Commission disagreed that bank acceptance drafts act merely as a bank guarantee for a payment at maturity date. The Commission observed that in the case of the sampled exporting producers, the bank acceptance draft is an actual means of payment acknowledged in the sales contract, and the payment obligation of the drawer towards the supplier is cancelled by the payment with a bank acceptance draft. The payment of the supplier by the drawer happens at the moment of the endorsement of the bank acceptance draft, while at maturity, the drawer honours its payment obligation towards the bank. Therefore, the bank acceptance draft cannot be classified merely as an additional guarantee of a future payment and this claim was rejected.

(376)

Consequently, the Commission reiterated its conclusion that in terms of their effects bank acceptance drafts are a form of a short-term financing allowing the exporting producers to finance their purchases. The benefit provided to the cooperating exporting producers is the financing cost savings due to the fact that the use of financing through bank acceptance drafts was not remunerated.

(377)

Concerning specificity, as mentioned in recital (116), according to Decision No 40, financial institutions shall provide credit support to encouraged industries.

(378)

The Commission considered that bank acceptance drafts are another form of preferential financial support by financial institutions to encouraged industries such as the OFC sector. Indeed, as specified in Section 3.1 above, the OFC sector is among the encouraged industries and is therefore eligible for all possible financial support. Bank acceptance drafts, as a form of financing, are part of the preferential financial support system by financial institutions to encouraged industries, such as the OFC industry.

(379)

No evidence was provided that any undertaking in the PRC (other than within encouraged industries) can benefit from bank acceptance drafts under the same preferential terms and conditions.

(380)

Following final disclosure, the ZTT Group claimed that bank acceptance drafts are not specific since they are widely used by almost all business operators in the PRC and thus are not limited to the OFC sector or to ZTT Group.

(381)

In this respect, the Commission referred to recital (116) where it presented evidence that according to Decision No 40, financial institutions are required to provide credit support to encouraged industries.

(382)

The Commission based its assessment regarding the specificity of the subsidy scheme on available governmental documents, such as plans and regulations, on encouraged industries. The GOC clearly defined which industries are encouraged limiting the specific preferential financing benefits only to those ones. Therefore, even if a number of other industries specifically defined as encouraged also enjoyed the same or similar preferential conditions as the OFC industry, this does not render preferential financing and in particular bank acceptance drafts generally available to all industries.

(383)

Furthermore, even if a form of financing could be in principle available to companies in other industries, the concrete conditions, under which such financing is offered to companies from a certain industry, such as the financing remuneration and the volume of financing, might make it specific. There was no evidence submitted by any of the interested parties demonstrating that the preferential financing through bank acceptance drafts of companies in the OFC industry is based on objective criteria or conditions in the sense of Article 4(2)(b) of the basic Regulation. Therefore, the claim was rejected.

(384)

For the calculation of the amount of the countervailable subsidy, the Commission assessed the benefit conferred on the recipients during the investigation period.

(385)

As already mentioned in recitals (357) and (370), bank acceptance drafts are a form of short-term financing that enhance the capital efficiency of the drawer by facilitating its working capital and meeting its cash needs as they are largely used as a means of payment in commercial transactions instead of cash. The Commission found that the sampled exporting producers used bank acceptance drafts to address their needs for short-term financing without paying a remuneration.

(386)

The Commission thus concluded that bank acceptance drawers should pay a remuneration for the period of financing. The Commission considered that the period of financing started on the date of the issuance of the bank acceptance draft and ended on the maturity date of the bank acceptance draft. Regarding bank acceptance drafts issued before the investigation period and banks acceptance drafts with a maturity date after the end of the investigation period, the Commission calculated the benefit only for the period of financing covered by the investigation period.

(387)

In accordance with Article 6(b) of the basic Regulation, the Commission considered that the benefit thus conferred on the recipients is the difference between the amount that the company had actually paid as remuneration of the financing by bank acceptance drafts and the amount that it should pay by applying a short-term financing interest rate.

(388)

The Commission determined the benefit resulting from the non-payment of a short-term financing cost. Considering that bank acceptance drafts are a form of short-term financing and that they effectively have the same purpose as short-term working capital loans, the Commission considered, as established in previous investigations (91), that bank acceptance drafts should bear a cost equivalent to a short-term loan financing. Therefore, the Commission applied the same methodology as to short-term loans financing denominated in RMB, described in Section 3.5.3.1 above.

(389)

Following final disclosure, the FTT Group submitted that the Commission should consider the fees paid by the group in the calculation of the benefit.

(390)

The Commission already noted in recital (371) that the sampled companies that used bank acceptance drafts during the investigation period only paid a commission for the acceptance service provided by the bank, which was in general 0,05 % of the face value of the draft. In fact, this commission paid for the processing of the bank acceptance draft by the bank, is a distinct element from the financing granted by the bank, for which the cooperating exporting producers did not bear any cost. This fee is paid in order to cover the bank’s administrative costs of processing the bank acceptance drafts. The Commission countervailed only the financing part of the bank acceptance drafts (namely, the part equivalent to short-term financing); it did not analyse whether the acceptance commission also involved a countervailable subsidy. Therefore, the claim was rejected.

(391)

The ZTT Group disagreed with the use of the benchmark for short-term loans as it considered bank acceptance drafts being a guarantee for which a commission should be charged. In this respect, the ZTT Group referred to the New York Federal Reserve which makes it clear that bank acceptance drafts operate more like a guarantee than a loan.

(392)

The Commission disagreed with the stance of the ZTT Group. According to publicly available data concerning bank acceptance drafts in the US, in practice the bank typically buys the bank acceptance draft from the drawer by applying a discount rate, which is similar to an interest rate, and therefore, the acceptance serves as a medium for the bank to advance credit (92). Furthermore, in other jurisdictions such as Canada and Malaysia, when the bank accepts the draft it advances the funds after deducting the applicable discount rate (93). Indeed, the Bank of Canada Discussion Paper: A Primer on the Canadian Bankers’ Acceptance Market provides that ‘the drafts are purchased by the lenders at a discount to their face amount and the borrower receives the discounted proceeds as a loan. The discount rate at which the lenders purchase the drafts is often based on the CDOR rate’. According to Article 14(4) of the Malaysian Guideline son Bankers acceptances (2004), ‘the drawer of the BA shall be required to discount the [banker acceptance] with the accepting bank if the purchase has yet to be paid, in which case, the accepting bank is required to pay the discounted proceeds to the supplier of the goods’. Therefore, the bank acceptance drafts primarily operate as a type of financing and not as a guarantee. Therefore, the claim was rejected.

(393)

Companies from the two sampled groups have issued convertible corporate bonds during the investigation period. Both convertible bonds have a progressive interest rate structure with very low interest rates, ranging between 0,2 % and 2 %, which is much below the PBOC Loan Benchmark Rate and below the Loan Prime Rate of the NIFC (94).

(394)

The Commission established that both sampled companies benefited from preferential financing in the form of convertible bonds.

(395)

The Regulations on the Administration of Corporate Bonds and the Administrative Measures for the Issuance and Trading of Corporate Bonds set the general legal framework applicable to corporate bonds. However, there is a set of specific legislation applicable to convertible corporate bonds, namely the Administrative Measures on Issuance of Securities by Listed Companies, the Administrative Measures on Issue and Underwriting of Securities and the Administrative Measures on Sponsorship for Securities Issuance and Listing.

(396)

Article 14 of the Administrative Measures on Issuance of Securities by Listed Companies defines ‘convertible corporate bonds’ as ‘corporate bonds which are issued by an issuing company pursuant to law and which may be converted to shares during a certain period and under stipulated conditions’.

(397)

Pursuant to Article 11 of the Securities Law (version 2014), which was applicable at the time of the issuance of the convertible bonds by the sampled companies, Article 45 of the Administrative Measures on Issuance of Securities by Listed Companies and Article 2 of the Administrative Measures on Sponsorship for Securities Issuance and Listing, companies that want to issue convertible corporate bonds need to solicit the services of a securities sponsor, which acts as an underwriter. The sponsor organizes the issuance of the bonds, recommends the issuer, submits the application file to the China Securities Regulatory Commission (‘CSRC’) for approval, negotiates the interest rates at which the bond will be presented to investors and is responsible for finding investors which would accept the agreed terms of issuance of the bond, including the interest rate.

(398)

In line with the regulatory framework, convertible bonds cannot be issued and traded freely in China. The issuance of each bond must be approved by the CSRC. Article 16 of the Securities Law (version 2014) stipulates that ‘listed companies issuing convertible corporate bonds shall […] satisfy the requirements stipulated in this Law for public offering of shares; and shall obtain the approval of the securities regulatory authorities of the State Council’. According to Article 3 of the Administrative Measures on Issue and Underwriting of Securities, which applies to convertible bonds, ‘the CSRC shall supervise and administer the offering and underwriting of securities to the law’. Furthermore, according to Article 10 of the Regulations on the Administration of Corporate Bonds, there are annual quotas for the issuance of corporate bonds.

(399)

According to Article 16 of the Securities Law (version 2014), the public issuance of bonds should satisfy the following requirements: ‘the usage purpose of the proceeds shall comply with State industrial policies’ and ‘the proceeds from a public offering of corporate bonds shall be used for approved purpose(s) only’. Article 12 of the Regulations on the Administration of Corporate Bonds reiterates that the purpose of the raised funds must comply with the industrial policies of the State. Furthermore, Article 10(2) of the Administrative Measures for the Issuance of Securities by Listed Companies, which is a lex specialis applicable to convertible bonds, stipulates that ‘the purposes of use of the fund raised are in line with the industrial policies of the State’.

(400)

During the RCC, the GOC explained that this sentence means that the funds raised must not be for projects falling under the ‘limited’ industries in the ‘Guiding Catalogue for Industry Restructuring’. This catalogue consists of three categories of projects, i.e. ‘encouraged’, ‘limited’, and ‘eliminated’. In the ‘limited’ category, new projects are prohibited and ongoing production is directed to innovate and upgrade, while in the ‘eliminated’ category, existing projects are banned from seeking investment. Therefore, it can be concluded that ‘in line with the industrial policies of the State’ could only mean that the investment project falls under the ‘encouraged’ content, which is entitled to receive credit support from financial institutions.

(401)

As explained in recital (116), Decision No 40 refers to ‘The Guiding Catalogue for Industry Restructuring’ and provides that if ‘the investment project belongs to the encouragement content it shall be examined and approved and put on records according to the relevant national regulations on investment; all financial institutions shall provide credit support according to the credit principles’. It follows that the issuance of convertible corporate bonds, which, as shown, necessarily target an encouraged industry, corresponds with the practice of financial institutions to support those industries.

(402)

The interest rates on corporate bonds are also strictly regulated. Article 16 of the Administrative Measures for the Issuance of Securities by Listed Companies provides that ‘the interest rate of a convertible corporate bond shall be determined by the issuing company and the leading underwriter through negotiations, but it shall satisfy the relevant provisions of the State’. According to Article 16(5) of the Securities Law (version 2014), ‘the coupon rate of the corporate bonds shall not exceed the coupon rate stipulated by the State Council’. In addition, Article 18 of the Regulations on the Administration of Corporate Bonds, which is generally applicable to all bonds, provides further details by stating that, ‘the interest rate offered for any corporate bonds shall not be higher than 40 % of the prevailing interest rate paid by banks to individuals for fixed-term savings deposits of the same maturity’.

(403)

According to Article 17 of the Administrative Measures for the Issuance of Securities by Listed Companies, ‘to publicly issue convertible corporate bonds, a company shall entrust a qualified credit rating agency to make credit ratings and follow-up ratings’. In addition, Article 18 of the generally applicable Administrative Measures for the Issuance and Trading of Corporate Bonds stipulates that only certain bonds complying with strict quality criteria, such as an AAA credit rating, may be issued in a public manner to public investors or be issued in a public manner to qualified investors only at the sole discretion of the issuer. The corporate bonds that fail to meet these standards can be issued in a public manner only to qualified investors.

(404)

According to the China bond market insight 2021 by Bloomberg, most of the investors are institutional investors, including financial institutions. In particular, commercial banks represent 57 % of the investors and policy banks represent 3 % (99). Furthermore, the Commission found that 85 % of the investors of the convertible bond issued by one of the sampled companies are institutional investors, a category of investors that includes financial institutions.

(405)

Furthermore, as an encouraged industry under the ‘Guiding Catalogue for Industry Restructuring’, the OFC industry is entitled to credit support by financial institutions based on Decision No 40. The fact that convertible bonds, such as the convertible bonds issued by the sampled companies, bear a low interest rate is a strong indication that financial institutions are the major investor in these bonds. They are obliged to provide ‘credit support’ to these companies and would take into account other considerations than the interest remuneration when taking the investment/financing decision, such as policy objectives. Indeed, an investor operating in market conditions would be more sensitive to the financial return on his investment and would most probably not invest in convertible bonds bearing very low interest rate. Moreover, the conclusions reached by the Commission about the financial situation of both groups of exporting producers in Section 3.5.3.3 above in terms of their liquidity and solvency profiles further indicate that investors operating in market conditions would not invest in financial instruments such as convertible bonds, offering low financial return, while the issuer presents high liquidity and solvency risks. Therefore, in the Commission’s view only investors having motivations other than a financial return on investment, such as complying with the legal obligation to provide financing to companies in encouraged industries, would make such an investment.

(406)

Consequently, taking into account the facts exposed in recitals (404) and (405), the Commission considered that there is a body of corroborating evidence, according to which a major proportion of the investors in the convertible bonds issued by the sampled companies is constituted by financial institutions which have a legal obligation to provide credit support to OFC producers.

(407)

Further, as described in Section 3.5.1 above, the financial institutions are characterized by a strong State presence, and the GOC has the possibility to exercise a meaningful influence on them. The general legal framework, in which these financial institutions operate is also applicable to convertible bonds.

(408)

In Section (1) and (2) above, the Commission concluded that State-owned financial institutions are public bodies within the meaning of Article 2(b) read in conjunction with Article 3(1)(a)(i) of the basic Regulation and that they are in any event considered entrusted or directed by the GOC to carry out functions normally vested in the government within the meaning of Article 3(1)(a)(iv) of the basic Regulation. In Section 3.5.1.2 above, the Commission concluded that private financial institutions are also entrusted and directed by the government.

(409)

The Commission also sought concrete proof of the exercise of control in a meaningful way based on concrete issuances of convertible bonds. It therefore examined the overall legal environment as set out above in recitals (395) to (403), in combination with the concrete findings of the investigation.

(410)

The Commission found that the convertible bonds were issued by the two groups of sampled exporting producers at very low and similar interest rates, regardless of the companies’ financial and credit risk situation.

(411)

In practice, interest rates on convertible bonds are influenced by the credit rating of the company, similar to loans. However, the Commission concluded in recital (280) that the local credit rating market is distorted and credit ratings are unreliable. As stated in recital (274), five Chinese local rating agencies dominate the bond market and around 90 % of the bonds are rated AAA by local crating agencies, while many of the issuers have received a lower S&P global issuer rating of A and BBB.

(412)

This was illustrated by the fact that the credit rating reports for the bonds issued by the sampled companies did not correspond to their actual financial situation.

(413)

In light of the above considerations, the Commission concluded that the Chinese financial institutions, which are the major investor in the convertible bonds issued by the sampled companies, followed the policy orientations laid down in Decision No 40 by providing preferential financing at a very low interest rate to companies pertaining to an encouraged industry and thus acted either as public bodies within the meaning of Article 2(b) of the basic Regulation or as bodies which are entrusted or directed by the government within the meaning of Articles 3(1)(a)(iv) of the basic Regulation.

(414)

By accepting to invest in convertible bonds with a very low rate of return irrespective of the risk profile of the issuer, the financial institutions provided a benefit to the sampled exporting producers.

(415)

Following final disclosure, the GOC contested the conclusion of the Commission that the financial institutions, which purchased a major part of the convertible corporate bonds at issue, have acted as public bodies. The GOC claimed that the purchase of corporate bonds and convertible corporate bonds is a regular commercial practice that occurs in all major jurisdictions, including the Union and the US. According to the GOC, the function performed by financial institutions when they buy bonds or when they provide loans is completely different and thus the Commission was under the obligation to conduct a specific assessment if financial institutions could be considered public bodies for the function of buying bonds and to conduct a case-by-case assessment of each financial institution. The GOC also submitted that the Commission did not analyse whether there existed purchasers of corporate bonds and convertible bonds other than the Chinese banks and financial institutions and if there were private purchasers. Furthermore, the GOC submitted that the purpose of the Chinese financial supervision system with respect to corporate bonds and convertible bonds is to ensure safety of the system and to protect the right and interests of the investors and that this system as such does not demonstrate interference from the government.

(416)

The Commission disagreed with the statement of the GOC that it did not carry out a specific assessment of the conduct of financial institutions as public bodies for the function of buying bonds. In addition to the conclusions reached by the Commission in Section 3.5.1 above, the Commission also sought concrete proof of the exercise of control in a meaningful way based on the concrete issuances of convertible bonds and carried out a specific assessment in recitals (409) to (413). While the Commission agreed with the GOC that the purchase of corporate bonds and convertible bonds may be in principle a regular commercial practice that occurs in all major jurisdictions, it pointed out that the purchase of corporate bonds by Chinese financial institutions is characterised by a State interference as demonstrated in recital (413). The Commission also disagreed with the allegation of the GOC that it did not analyse the existence of purchasers of corporate bonds and convertible bonds other than the Chinese banks and financial institutions. In fact, the Commission pointed out in recitals (404) and (406) that 85 % of the investors of the convertible bond issued by one of the sampled companies were institutional investors, including financial institutions, and that there is a body of corroborating evidence, according to which a major proportion of the investors in the convertible bonds issued by the sampled companies is constituted by financial institutions which have a legal obligation to provide credit support to OFC producers. Considering the high proportion of institutional investors, including financial institutions, the Commission was of the opinion that they have determined the characteristics of the convertible corporate bonds at issue, in particular the low coupon rate, and that other investors, such as private investors only adhered to such conditions. Finally, the Commission considered that the Chinese financial supervision system with respect to corporate bonds and convertible bonds is only an element, which together with the normative framework governing financing by financial institutions described in recitals (405) and (407) as well as with the concrete behaviour of the financial institutions pointed to the interference from the GOC. Therefore, the claims of the GOC were rejected.

(417)

The Commission considered that the preferential financing through convertible bonds is specific within the meaning of Article 4(2)(a) of the basic Regulation. In fact, convertible bonds cannot be issued without the approval of the CSRC, which checks if all the regulatory conditions for the issuance of the convertible bonds are met. As explained in recital (399), according to the Securities Law of the PRC (version 2014) and the Administrative Measures on Issuance of Securities by Listed Companies specifically applicable to convertible bonds, the issuance of convertible bonds must be in line with the State’s industrial policies. The Commission considered in recital (400) that ‘in line with the industrial policies of the State’ means that the investment project falls under the ‘encouraged’ content in the Guiding Catalogue of Industry Restructuring to which the OFC industry belongs.

(418)

Following final disclosure, the GOC submitted that bonds markets are regulated in every country as this is a question of economic stability. The criteria that must be met by a company in order to issue bonds are financial in nature and are not policy-oriented. The GOC disagreed with the stance that the issuance of convertible bonds must be in line with the State’s industrial policies and repeated that the OFC industry is not an encouraged industry. The GOC further claimed that the Commission has not demonstrated that the sale of bonds is explicitly limited to certain companies.

(419)

In this respect, although the Commission agreed that bonds markets are regulated in every country and that most of the criteria that must be met by a company in order to issue bonds are financial in nature, it disagreed with the claim of the GOC that the issuance of convertible bonds is not policy-oriented in China. First, the Commission reiterated its stance that the OFC sector is an encouraged industry. Second, the Commission considered that the wording of the Securities Law of the PRC (version 2014) and the Administrative Measures on Issuance of Securities by Listed Companies specifically applicable to convertible bonds, according to which the issuance of convertible bonds must be in line with the State’s industrial policies is clear enough. Finally, the Commission established in recital (414) that by accepting to invest in convertible bonds with a very low rate of return irrespective of the risk profile of the issuer, the financial institutions provided a benefit to the sampled exporting producers. In fact, the financial advantage provided through the purchase of convertible corporate bonds with such a low coupon rate is ‘explicitly limited’ to encouraged industries, such as the OFC industry, by the normative framework designed by the GOC. Therefore, the claims of the GOC were rejected.

(420)

Convertible bonds are a hybrid debt instrument which have features of a bond such as interest payments while also providing the opportunity to convert the invested amount into shares under certain conditions. The Commission found that only a negligible part of the convertible bonds of both sampled companies has been converted into shares. Therefore, during the investigation period, the convertible bonds of the two sampled companies operated only as a bond, providing investors a return in the form of an interest similarly to loans. Since the calculation methodology for loans described in recital (310) is based on bonds, the Commission decided to follow the same methodology given these specific circumstances of this case (100). This means that the relative spread between US AA corporate bonds and US BB corporate bonds with the same duration is applied to the Loan Benchmark Rates published by the PBOC or, after 20 August 2019, the Loan Prime Rate published by the NIFC (101), to establish a market-based interest rate for bonds.

(421)

Following final disclosure, the GOC, the ZTT Group and the FTT Group objected the use of the same benchmark for bonds and convertible bonds as the one applied to loans since bonds, in particular convertible bonds, and loans are different financial instruments and that the bonds market works differently from the private lending market. The GOC claimed that there is no basis for the Commission to use the PBOC benchmark as a starting point and then add a mark-up. According to the GOC, the Commission should directly use the interest rate for bonds issued by BB rated companies and gave examples that European OFC and steel producers with BB rating issued bonds for a similar maturity period at significantly lower rates than the calculated benchmark rate during the same period. The ZTT Group argued that the main advantage of issuing bonds compared to raising loans from banks is that the interest rate (i.e. coupon rate) companies have to pay to the bond investors is often less that the interest rate that they would have to pay on a bank loan. According to the ZTT Group, issuing convertible bonds is even more attractive because they typically bear a lower coupon rate because they enable investors to convert the bonds into equity and thus receive investment returns via equity dividends. The FTT Group also stated that the benefit of convertible bonds is not the interest income but the conversion right. Both the FTT Group and the ZTT Group suggested using the coupon rate of US BB rated corporate bonds as a benchmark for the calculation of the benefit for bonds and convertible bonds.

(422)

In recital (337), the Commission explained why it considered that loans and corporate bonds are similar financial debt instruments, which justified the application of the same benchmark for both instruments in the specific circumstances of this case. In recitals (325) to (333), the Commission explained why it judged that the benchmark for loans and corporate bonds is appropriate, why it cannot use the coupon rate of US BB rated corporate bonds as a benchmark and why the comparison with EU interest rates/coupon rates is irrelevant. The Commission agreed that convertible corporate bonds are a hybrid debt instrument which also provides the opportunity to convert the invested amount into shares under certain conditions and are as such in principle different from corporate bonds. The Commission did look into the possibility to quantify this convertibility element as well as the use of the US BB rated corporate bonds as suggested by the GOC, the FTT Group, and the ZTT Group. However, the benchmark proposed by these parties did not take into consideration such convertibility and it was a benchmark for corporate bonds de-linked from the Chinese markets as it concerned bonds issued in a different currency (i.e. USD and not CNY), and with a substantially different risk-free interest rate. No other possible benchmarks were submitted, and no further public information was available to provide for a more accurate benchmark for convertible bonds (e.g. indices for the premium on US AA rated convertible bonds and US BB rated convertible bonds) or for the convertibility aspect of these bonds. The companies’ own data also lacked the possibility for any proper comparison on the difference in coupon rate between bonds and convertible bonds, as one of the sampled companies did not have any bonds outstanding and the bonds of the other sampled company did have a different maturity and financing purpose from its convertible bond. Furthermore, the Commission concluded in recital (420) that only a negligible part of the convertible bonds of both sampled companies has been converted into shares, and that in practice the exporting producers used this financing instrument interchangeably with the other financing instruments, that is loans and corporate bonds. Therefore, since during the investigation period these convertible bonds operated only as a bond, providing investors a return in the form of an interest similarly to loans, and since the use of the benchmark at a free-risk rate as published by the PBOC or the NIFC was estimated to be conservative, the Commission confirmed its decision to apply the benchmark for loans as stated in recital (420).

(423)

The benefit is the difference between the interest amount that the company should have paid by applying the market-based interest rate referred to in recital (420) and the actual interest paid by the company.

(424)

One of the sampled groups benefited from preferential financing in the form of corporate bonds.

—

Law of the People’s Republic of China on Securities (version 2014) (‘Securities Law’) (102);

—

Administrative Measures for the Issuance and Trading of Corporate Bonds, Order of the China Securities Regulatory Commission No 113, 15 January 2015;

—

Regulations on the Administration of Corporate Bonds, issued by the State Council on 18 January 2011

—

Measures of the Administration of Debt Financing Instruments of Non-financial Enterprises on the Inter-bank Bond Market Issued by the People’s Bank of China, Order of the People’s Bank of China [2008] No 12, 9 April 2008;

(425)

In line with the regulatory framework, bonds cannot be issued or traded freely in China. The issuance of each bond must be approved by various governmental authorities, such as the PBOC, the NDRC or the CSRC, depending on the type of bond and the type of issuer. In addition, according to the Regulations on the Administration of Corporate Bonds, there are annual quotas for the issuance of corporate bonds.

(426)

Furthermore, according to Article 16 of the Securities Law applicable during the IP, a public offering of corporate bonds should satisfy the following requirements: ‘the usage purpose of the proceeds shall comply with State industrial policies […]’ and ‘the proceeds from a public offering of corporate bonds shall be used for approved purpose(s) only’. Article 12 of the Regulations on the Administration of Corporate Bonds reiterates that the purpose of the raised funds must comply with the industrial policies of the State. As explained in recitals (400) and (401), the issuance of corporate bonds under such conditions targets an encouraged industry such as the OFC industry and corresponds with the practice of financial institutions to support those industries.

(427)

According to Article 16(5) of the Securities Law (version 2014), ‘the coupon rate of the corporate bonds shall not exceed the coupon rate stipulated by the State Council’. In addition, Article 18 of the Regulations on the Administration of Corporate Bonds provides further details by stating that, ‘the interest rate offered for any corporate bonds shall not be higher than 40 % of the prevailing interest rate paid by banks to individuals for fixed-term savings deposits of the same maturity’.

(428)

Furthermore, Article 18 of the Administrative Measures for the Issuance and Trading of Corporate Bonds stipulates that only certain bonds complying with strict quality criteria, such as an AAA credit rating, may be issued in a public manner to public investors or be issued in a public manner to qualified investors only at the sole discretion of the issuer. The corporate bonds that fail to meet these standards can be issued in a public manner only to qualified investors. Therefore, it results that most corporate bonds are issued to qualified investors which have been approved by the CSRC and which are Chinese institutional investors.

(429)

In China, companies that want to issue corporate bonds need to solicit the services of a financial institution acting as an underwriter. Underwriters organize the issuance of bonds and negotiate the interest rate at which the bond will be presented to investors. The Commission established that the underwriter of the corporate bond issued by one of the sampled groups was among the financial institutions that also provided preferential financing, which was explained in Section 3.5.1 above.

(430)

Furthermore, according to the China bond market insight 2021 by Bloomberg, the bonds listed in the interbank bond market account for 88 % of the total trading volume of bonds. According to the same study, most of the investors are institutional investors, including financial institutions. In particular, commercial banks represent 57 % of the investors and policy banks represent 3 % (103). Therefore, investors buying corporate bonds are mainly Chinese banks, including State-owned banks.

(431)

As explained in recitals (405) and (406) above, the Commission considered that there is a body of corroborating evidence, according to which a major proportion of the investors in convertible bonds issued by the sampled companies is constituted by financial institutions which have a legal obligation to provide credit support to OFC producers. The same reasoning and conclusion also applies to corporate bonds as the conditions of issuance are very similar, in particular the condition to comply with the requirements of national laws, regulations and policy, and with the industrial policy of the State.

(432)

As described in recital (426), Article 16 of the Securities Law (version 2014) and Article 12 of the Regulations on the Administration of Corporate Bonds require that a public offering of corporate bonds complies with the industrial policies of the State. This has the effect that corporate bonds can only be issued for purposes that are in line with the targets of the planning of the GOC regarding encouraged industries as explained in recitals (393) and (394). The institutional investors, which are, as shown in recitals (397) and (430), to a large extent commercial banks and policy banks, have to follow the policy orientations laid down in Decision No 40.

(433)

Thus, the mechanism as described in recitals (116), (401) and (413) above applies to corporate bonds as well, i.e. Decision No 40 read together with the Guiding Catalogue for Industry Restructuring provides for specific treatment of certain projects within certain encouraged industries, such as the OFC industry. The beneficial treatment that was applied in favour of one of the sampled groups aggregated in the decision to invest in corporate bonds issued with an interest rate that does not reflect market based criteria.

(434)

As described in Section 3.5.1 above, the financial institutions are characterized by a strong State presence, and the GOC has the possibility to exercise a meaningful influence on them. The general legal framework, in which these financial institutions operate is also applicable to corporate bonds.

(435)

In Section (1) and (2) above, the Commission concluded that State-owned financial institutions are public bodies within the meaning of Article 2(b) read in conjunction with Article 3(1)(a)(i) of the basic Regulation and that they are in any event considered entrusted or directed by the GOC to carry out functions normally vested in the government within the meaning of Article 3(1)(a)(iv) of the basic Regulation. In Section 3.5.1.2 above, the Commission concluded that private financial institutions are also entrusted and directed by the government.

(436)

The Commission also sought concrete proof of the exercise of control in a meaningful way based on concrete issuances of corporate bonds. It therefore examined the overall legal environment as set out above in recitals (425) to (428), in combination with the concrete findings of the investigation.

(437)

The Commission found that the corporate bond was issued with an interest rate below the level that should have been expected in the companies’ financial and credit risk situation.

(438)

In practice, interest rates on corporate bonds are influenced by the credit rating of the company, similar to loans. However, the Commission concluded in recital (280) that the local credit rating market is distorted and credit ratings are unreliable. As stated in recital (274), five Chinese local rating agencies dominate the bond market and around 90 % of the bonds are rated AAA by local crating agencies, while many of the issuers have received a lower S&P global issuer rating of A and BBB.

(439)

This was illustrated by the fact that the credit rating reports for the corporate bond issued by the sampled company did not correspond to its actual financial situation.

(440)

In light of the above considerations, the Commission concluded that the Chinese financial institutions, which acted as underwriters in the issuance of the corporate bond by the sampled company and which are the major investors in the corporate bond, followed the policy orientations laid down in Decision No 40 by providing preferential financing to companies pertaining to an encouraged industry and thus acted either as public bodies within the meaning of Article 2(b) of the basic Regulation or as bodies which are entrusted or directed by the government within the meaning of Articles 3(1)(a)(iv) of the basic Regulation.

(441)

By organising the issuance of a corporate bonds with the interest rate below the market rate corresponding to the actual risk profile of the issuer and by accepting to invest in such corporate bond, the financial institutions provided a benefit to the sampled exporting producer.

(442)

As described in recital (417) above, the Commission considered that the preferential financing through bonds is specific within the meaning of Article 4(2)(a) of the basic Regulation as the bonds cannot be issued without approval from government authorities, and the Securities Law of the PRC (version 2014) states that the issuance of bonds must comply with the State’s industrial policies. As already mentioned in recital (131), the OFC industry is regarded as encouraged industry in the Guiding Catalogue of Industry Restructuring.

(443)

Since bonds are in essence just another type of debt instrument, similar to loans, and since the calculation methodology for loans is already based on a basket of bonds, the Commission decided to follow the calculation methodology for loans as described above in Section 3.5.3.3. This means that the relative spread between US AA corporate bonds and US BB corporate bonds with the same duration is applied to the PBOC Loan Benchmark Rate, or after 20 August 2019 to the Loan Prime Rate published by the NIFC, to establish a market-based interest rate for bonds, which is then compared with the actual interest rate paid by the company in order to determine the benefit.

(444)

The Commission established that both sampled groups of exporting producers benefited from preferential financing in the form of credit lines, bank acceptance drafts and convertible bonds. In view of the existence of a financial contribution, a benefit to the exporting producers and specificity, the Commission considered these types of preferential financing a countervailable subsidy.

(445)

The subsidy rate established with regard to the preferential financing described above during the investigation period for the sampled groups of companies amounted to:

Preferential financing: other types of financing

(446)

The complainant alleged that Sinosure provides short-, medium- and long-term export credit insurance, investment insurance and bond guarantees, among other services, on a concessional basis to encouraged industries. On its general website, Sinosure states that it promotes Chinese exports of goods, especially the exporting of high-tech products. According to a study undertaken by the Organisation for Economic Co-operation and Development (‘OECD’), the Chinese high-tech industry, of which the OFC industry is part, received 21 % of the total export credit insurance provided by Sinosure (104). Furthermore, Sinosure has taken an active role in fulfilling the ‘Made in China 2025’ Initiative, guiding enterprises to use national credit resources, carrying out scientific and technological innovation and technological upgrading, and helping ‘going out’ enterprises become more competitive in the global market (105).

(a)

Notice on the Implementation of the Strategy of Promoting Trade through Science and Technology by Utilising Export Credit Insurance (Shang Ji Fa [2004] No 368), issued jointly by MOFCOM and Sinosure;

(b)

840 plan included in the Notice by the State Council of 27 May 2009;

(c)

Notice on Cultivation and Development of the State Council on Accelerating Emerging Industries of Strategic Decision (GuoFa [2010] No 32 of 18 October 2010), issued by the State Council and its Implementing Guidelines (GuoFa [2011] No 310 of 21 October 2011)

(d)

Notice on the issuance of the 2006 edition of China’s High-tech Products Export Catalogue No 16 of the National Science and Technology Department (2006).

(447)

The two sampled groups of companies had outstanding export insurance agreements with Sinosure during the investigation period.

(448)

As mentioned in recital (158) above, Sinosure failed to provide the supporting documentation requested concerning its corporate governance such as Articles of Association. In addition, Sinosure did not provide more specific information about the export credit insurance provided to the OFC industry, the level of its premiums or detailed figures relating to the profitability of its export credit insurance business.

(449)

Therefore, the Commission had to complement the information provided by facts available.

(450)

According to information provided in previous anti-subsidy investigations (106) and according to Sinosure’s website (107), Sinosure is a State-owned policy-oriented insurance company established and supported by the State to support the PRC’s foreign economic and trade development and cooperation. The company is 100 % owned by the State. It has a board of directors and a board of supervisors. The Government has the power to appoint and dismiss the company’s senior managers. Based on this information, the Commission concluded that there is formal indicia of government control with respect to Sinosure.

(451)

The Commission further sought information about whether the GOC exercised meaningful control over the conduct of Sinosure with respect to the OFC industry.

(452)

According to the Notice on the issuance of the 2006 edition of China’s High-tech Products Export Catalogue No 16, ‘products included in the 2006 edition of the Export Catalogue may enjoy preferential policies granted by the State for the export of high-tech products’. The Export Catalogue of High-Tech Products specifically lists optical fibres, optical fiber communication transmission equipment and optical fibre cables. (108)

(453)

Furthermore, according to the Notice on the Implementation of the Strategy of Promoting Trade through Science and Technology by Utilising Export Credit Insurance (109), Sinosure should increase its support for key industries and products by strengthening its overall support for the export of high and new technology products, including ‘information and communications’ products. It should treat high and new technology industries, such as the OFC industry, listed in the China’s High-tech Products Export Catalogue, as its business focus and provide comprehensive support in terms of underwriting procedures, approval with limits, claims processing speed and rate flexibility. With regard to rate flexibility, it should give products the maximum premium rate discount within the floating range provided by the credit insurance company. As mentioned in recitals (86) and (118), the OFC industry is included in the more general category of ‘Information Industry’. Furthermore, the Annual Report of Sinosure for 2019 states that Sinosure has ‘supported steady development of key Industries’ and ‘accelerated growth of strategic emerging Industries’ (110).

(454)

On this basis, the Commission concluded that the GOC has created a normative framework that had to be adhered to by the managers and supervisors appointed by the GOC and accountable to the GOC. Therefore, the GOC relied on such normative framework in order to exercise control in a meaningful way over the conduct of Sinosure.

(455)

The Commission also sought concrete proof of the exercise of control in a meaningful way based on concrete insurance agreements. During the RCC, the GOC maintained that in practice Sinosure’s premiums were market-oriented and based on risk assessment principles. However, no specific examples with respect to the OFC industry or the sampled companies were provided.

(456)

In the absence of concrete evidence, the Commission therefore examined the concrete behaviour of Sinosure with regard to the insurance provided to the sampled companies. This behaviour contrasted with their official stance, as they were not acting based on market principles.

(457)

After comparing the total claims paid with the total insured amounts, based on the data in the Sinosure’s Annual Report for 2019 (111), the Commission concluded that on average Sinosure would need to charge 0,22 % of the insured amount as a premium to cover the cost of the claims (without even taking into account overhead expenses). However, in practice, the premiums paid by the sampled companies were much lower than the minimum fee needed to cover operational costs.

(458)

Therefore, the Commission concluded that the legal framework set out above is being implemented by Sinosure in the exercise of governmental functions with respect to the OFC sector. Sinosure acted as a public body in the sense of Article 2(b) of the basic Regulation read in conjunction with Article 3(1)(a)(i) of the basic Regulation and in accordance with the relevant WTO case-law. Furthermore, the sampled exporting producers received a benefit, since the insurance was provided at rates below the minimum fee needed for Sinosure to cover its operational costs.

(459)

The Commission also determined that the subsidies provided under the export insurance programme are specific, because they could not be obtained without exporting and are thus export contingent within the meaning of Article 4(4)(a) of the basic Regulation.

(460)

As Sinosure held a predominant market position during the investigation period, the Commission could not find a market-based domestic insurance premium. Therefore, in line with previous anti-subsidy investigations, the Commission thus used the most appropriate external benchmark, for which information was readily available, i.e. the premium rates applied by the Export-Import Bank of the United States of America to non-financial institutions for exports to OECD countries.

(461)

The Commission considered that the benefit conferred on the recipients is the difference between the amount that the company had actually paid as insurance premium and the amount that it should have paid by applying the external benchmark premium rate mentioned in recital (460).

(462)

The subsidy rate established with regard to this scheme during the investigation period for FTT Group and for ZTT Group amounted to:

Preferential financing and insurance: export credit insurance

(463)

According to the Law of the People’s Republic of China on Enterprise Income Tax (‘EIT Law’) (112), high and new technology enterprises to which the State needs to give key support benefit from a reduced enterprise income tax rate of 15 % rather than the standard tax rate of 25 %.

(464)

The legal basis of this programme is Article 28 of the EIT Law and Article 93 of the Implementation Rules for the Enterprise Income Tax Law of the PRC (113), as well as:

(465)

Chapter IV of the EIT Law contains provisions regarding ‘Preferential Tax Treatment’. Article 25 of the EIT Law, which stands as a chapeau for Chapter IV, provides that ‘The State will offer income tax preferences to Enterprises engaged in industries or projects the development of which is specially supported and encouraged by the State’. Article 28 of the EIT law provides that ‘the rate of enterprise income tax on high and new technological enterprises needing special support of the State shall be reduced to 15 %’.

(466)

Article 93 of the Implementation Rules for the Enterprise Income Tax Law clarifies that:

‘“The important high and new technology enterprises to be supported by the state” as referred to in Clause 2 of Article 28 of the Enterprise Income Tax Law refer to the enterprises which own key intellectual property rights and satisfy the following conditions:

Measures for the Administration of High-Tech Enterprise Identification and Key State Supported High and New Technology Areas shall be jointly formulated by the technology, finance and taxation departments under the State Council and come into effect after approved by State Council’.

(467)

The above-mentioned provisions clearly specify that the reduced enterprise income tax rate is reserved to ‘important high and new technology enterprises to be supported by the State’ which own key intellectual property rights and satisfy certain conditions such as ‘complying with the scope of the Key State Supported High and New Technology Areas’.

(468)

According to Article 11 of the Administrative Measures for the Recognition of High-Tech Enterprises (G.K.F.H. [2016] No 32), to be recognized as high-tech an enterprise must simultaneously meet certain conditions among which: ‘it has obtained the ownership of intellectual property rights, which plays a central role in technically supporting its main products (services), through independent research, transfer, grant, mergers and acquisitions, etc.’ and ‘the technology that plays a central role in technically supporting its main products (services) is within the range predetermined in the “high-tech fields supported by the state”‘.

(469)

The key high technology fields supported by the State are listed in the 2016 Catalogue of High-tech Fields Supported by the State. This catalogue clearly mentions under ‘I. Electronic Information’, point 4. ‘Communication technology’‘optical transmission network’ and ‘optical transmission system technology’, which cover optical fibre cables, as high technology fields supported by the State.

(470)

Companies benefiting from this measure have to file their income tax return and the relevant annexes. The actual amount of the benefit is included in the tax return.

(471)

The Commission found that companies within the sampled exporting producer groups qualified as high-tech companies during the investigation period and thus enjoyed a reduced EIT rates of 15 % or 12,5 %.

(472)

The Commission considered that the tax offset at issue is a subsidy within the meaning of Article 3(1)(a)(ii) and Article 3(2) of the basic Regulation because there is a financial contribution in the form of revenue foregone by the GOC that confers a benefit to the companies concerned. The benefit for the recipients is equal to the tax saving.

(473)

This subsidy is specific within the meaning of Article 4(2)(a) of the basic Regulation as the legislation itself limits the application of this scheme only to enterprises that are operating in certain high technology priority areas determined by the State as demonstrated in recital (466) to (468). As pointed out in recital (469), the OFC industry is such a high technology priority.

(474)

Following final disclosure, the GOC claimed that the tax exemption and deduction programs countervailed by the Commission do not constitute countervailable subsidies. According to the GOC, the alleged tax exemptions and deductions operate as a result of a system that establishes objective criteria or conditions governing the eligibility for accessing financial support, in which eligibility is automatic and the criteria and conditions laid down in the programmes are strictly adhered to, not favouring certain enterprises over others and purely economic and horizontal in nature. Therefore, the GOC claimed they are not specific within the meaning of Article 4(2)(b) of the basis Regulation.

(475)

The Commission disagreed with this claim as it considered the tax schemes described in Sections 3.7.1.1 to 3.7.1.3 specific under Article 4(2)(a) of the basis Regulation, which provides that ‘where the granting authority, or the legislation pursuant to which the granting authority operates, explicitly limits access to a subsidy to certain enterprises, such subsidy shall be specific’. Indeed, the subsidy schemes at issue have their legal basis in Chapter IV ‘Tax Preferences’ of the EIT. By its name and content, this chapter explicitly provides for specific preferential treatment which ‘explicitly limits access to a subsidy to certain enterprises’. Consequently, the subsidies provided under these tax schemes are specific under Article 4(2)(a) of the basis Regulation. The Claim was therefore rejected.

(476)

The amount of countervailable subsidy was calculated in terms of the benefit conferred on the recipients during the investigation period. This benefit was calculated as the difference between the total tax payable according to the normal tax rate and the total tax payable under the reduced tax rate.

(477)

The subsidy rate established for this specific scheme was 0,10 % for the FTT Group and 0,48 % for the ZTT Group.

(478)

The tax offset for research and development entitles companies to preferential tax treatment for their R&D activities in certain high technology priority areas determined by the State and when certain thresholds for R&D spending are met.

(479)

More specifically, R&D expenditures incurred to develop new technologies, new products and new techniques, which do not form intangible assets and are accounted into the current term profit and loss, are subject to an additional 75 % deduction after being deducted in full in light of the actual situation. Where the above-mentioned R&D expenditures form intangible assets, they are subject to amortization based on 175 % of the intangible asset costs. Since January 2021, the additional pre-tax deduction for R&D expenses was increased to 100 % (115).

(480)

The legal basis for the programme is Article 30(1) of the EIT Law, along with the Implementation Rules for the Enterprise Income Tax Law of the PRC as well as the following notices:

(481)

In previous investigations (116), the Commission established that the ‘new technologies, new products and new crafts’, which can benefit from the tax deduction, are part of certain high technology fields supported by the State. As mentioned in recital (469), the key high technology fields supported by the State are listed in the 2016 Catalogue of High-tech Fields Supported by the State.

(482)

As set out in recital (468), Chapter IV of the EIT Law contains provisions regarding ‘Preferential Tax Treatment’, in particular Article 25. Article 30(1) of the EIT Law, which is also part of this Chapter, provides that ‘research and development expenses incurred by enterprises in the development of new technologies, new products and new techniques’ may be additionally deducted at the time of calculating taxable income. Article 95 of the Implementation Rules for the Enterprise Income Tax Law clarifies the meaning of ‘R&D expenditures incurred for the purpose to develop new technologies, new products and new crafts’ laid down in Article 30(1) of the EIT Law.

(483)

According to the Circular on Raising the Proportion of Pre-tax Super Deduction of Research and Development Expenses (Cai Shui [2018] No 99), ‘with respect to research and development (R&D) expenses actually incurred by an enterprise from its R&D activities, an extra 75 % of the actual amount of expenses is deductible before tax, in addition to other actual deductions, during the period from January 1, 2018 till December 31, 2020, provided that the said expenses are not converted into the intangible asset and balanced into this enterprise’s current gains and losses; however, if the said expenses have been converted into the intangible asset, such expenses may be amortized at a rate of 175 % of the intangible asset’s costs before tax during the above-said period’.

(484)

The Commission found out that companies within the sampled groups enjoyed ‘additional deduction on research and development expenses incurred from the research and development of new technologies, new products and new techniques’.

(485)

The Commission considered that the tax offset at issue is a subsidy within the meaning of Article 3(1)(a)(ii) and Article 3(2) of the basic Regulation because there is a financial contribution in the form of revenue foregone by the GOC that confers a benefit to the companies concerned. The benefit for the recipients is equal to the tax saving.

(486)

This subsidy is specific within the meaning of Article 4(2)(a) of the basic Regulation as the legislation itself limits the application of this measure only to enterprises that incur R&D expenses in certain high technology priority areas determined by the State, such as the OFC sector.

(487)

The amount of countervailable subsidy was calculated in terms of the benefit conferred on the recipients during the investigation period. This benefit was calculated as the difference between the total tax payable according to the normal tax rate and the total tax payable after the additional 75 % deduction of the actual expenses on R&D.

(488)

The subsidy rate established for this specific scheme was 1,28 % for the FTT Group and 0,13 % for the ZTT Group.

(489)

The EIT Law offers income tax preferences to Enterprises engaged in industries or projects the development of which is specifically supported and encouraged by the State and in particular, exempt from tax the income from equity investment, such as dividends and bonuses, between eligible resident enterprises.

(490)

The legal basis for the programme is Article 26(2) of the EIT Law, along with the Implementation Rules for the Enterprise Income Tax Law of the PRC.

(491)

Article 25 of the EIT, which stands as a chapeau for Chapter IV ‘Preferential Tax Policies’, provides that ‘The State will offer income tax preferences to Enterprises engaged in industries or projects the development of which is specially supported and encouraged by the State’. Furthermore, Article 26(2) specifies that the tax exemption is applicable to income from equity investments between ‘eligible resident enterprises’, which appears to limit its scope of application to only certain resident enterprises.

(492)

The Commission found that some companies in the sampled groups received an exemption from tax of dividend income between qualified resident enterprises.

(493)

The Commission considered that this scheme is a subsidy under Article 3(1)(a)(ii) and Article 3(2) of the basic Regulation because there is a financial contribution in the form of revenue foregone by the GOC that confers a benefit to the companies concerned. The benefit for the recipients is equal to the tax saving.

(494)

This subsidy is specific within the meaning of Article 4(2)(a) of the basic Regulation as the legislation itself limits the application of this exemption only to qualified resident enterprises which have the major support of, and the development of which is encouraged by the State.

(495)

Following final disclosure, the ZTT Group claimed that the exemption of dividends is destined to eliminate double taxation of the same income at both parent and subsidiary companies, which is an internationally accepted tax practice.

(496)

In this respect, although the Commission agreed that the elimination of double taxation is an internationally recognised tax practice, Article 26(2) of the EIT is part of Chapter IV ‘Tax Preferences’, which provides for a number of preferential tax treatments that are exemptions to the general taxation rules. Furthermore, as explained in recital (491), Article 25 of the EIT, which stands as a chapeau for Chapter IV ‘Preferential Tax Policies’, provides that ‘The State will offer income tax preferences to Enterprises engaged in industries or projects the development of which is specially supported and encouraged by the State’. In addition, Article 26(2) specifies that the tax exemption is applicable to income from equity investments between ‘eligible resident enterprises’, which appears to limit its scope of application to only certain resident enterprises. Therefore, the Commission considered that such preferential tax policy is limited to certain industries, which are specifically supported and encouraged by the State, such as the OFC industry, and is therefore specific within the meaning of Article 4(2)(a) of the basic Regulation. Consequently, the Commission confirmed its conclusion described in recitals (493) and (494) that this scheme is a countervailable subsidy.

(497)

The Commission has calculated the amount of the subsidy by applying the normal tax rate to the dividend income that has been deducted from taxable income.

(498)

Following final disclosure, the ZTT Group claimed that the Commission should distinguish two different tax treatments in the income tax return, i.e. dividend income and the tax adjustment amount for investment, the latter not being a dividend income concerned by the provisions of Article 26(2) of the EIT. The Commission agreed with this claim and corrected the benefit calculations accordingly.

(499)

The subsidy rate established for this specific scheme was 1,05 % for the FTT Group and 0,21 % for the ZTT Group.

(500)

According to Article 32 of the EIT law, ‘where accelerated depreciation of fixed assets of an enterprise is really necessary due to technological advancement or other reasons, the number of years for the depreciation may be lessened or the accelerated depreciation method may be adopted’.

(501)

The legal basis for the programme is Article 32 of the EIT Law, along with the Implementation Rules for the Enterprise Income Tax Law of the PRC as well as the following notices:

(502)

According to the Notice on the Policies of Deduction of Equipment and Appliances for Enterprise Income Tax Purposes (Cai Shui [2018] No 54), ‘where the unit value of a piece of equipment or appliance newly purchased by an enterprise during the period from January 1, 2018 to December 31, 2020 does not exceed RMB five million, the enterprise is allowed to include such value in the cost and expenses of the current period on a lump-sum basis for deduction upon calculation of its taxable income, and is no longer required to calculate depreciation on an annual basis’. This legislation is not industry-specific.

(503)

As regards assets with unit value above 5 million RMB, the Notice on Fine-tuning the Enterprise Income Tax Policies Applicable to Accelerated Depreciation of Fixed Assets (Cai Shui [2014] No 75) and the Notice on Further Fine-tuning the Enterprise Income Tax Policies Applicable to Accelerated Depreciation of Fixed Assets (Cai Shui [2015] No 106) continue to apply. According to theses notices, fixed assets purchased by companies in 10 key industries may opt for the accelerated depreciation method.

(504)

The Commission established that, during the investigation period, the sampled companies have not applied accelerated depreciation for assets with unit value that exceeds 5 million RMB. Therefore, since those assets did not fall under Notice Cai Shui [2014] No 75 and Notice Cai Shui [2015] No 106, the Commission found that the exporting producers did not benefit from countervailable subsidies.

(505)

Following final disclosure, the complainant argued that the sampled exporting producers could have benefitted from accelerated depreciation of houses and buildings, which are excluded from the scope of the 5 million RMB threshold according to Article 2 of the Notice on the Policies of Deduction of Equipment and Appliances for Enterprise Income Tax Purposes (Cai Shui [2018] No 54). In this respect, the Commission confirmed that the sampled companies did not benefit from accelerated depreciation of houses and buildings during the investigation period.

(506)

The Commission considered that the exporting producers did not benefit from countervailable subsidies under this programme during the IP.

(507)

An organisation or individual using land in cities, county towns and administrative towns and industrial and mining districts shall normally pay urban land use tax. Land use tax is collected by the local tax authorities where the land is used. However, certain categories of land, such as land reclaimed from the sea, land for the use of government institutions, people’s organisations and military units for their own use, land for use by institutions financed by government allocations from the Ministry of Finance, land used by religious temples, public parks and public historical and scenic sites, streets, roads, public squares, lawns and other urban public land are exempted from the land use tax.

(508)

The legal basis for this programme is:

(509)

One company in one of the sampled groups benefited from a reduction in the land use tax amount of 60 % based on special policy applicable to the high-tech companies in 2019 and 2020 pursuant to Article 2(1) of ‘Several Opinions on Vigorously Supporting the Sustainable and Healthy Development of the Private Economy’ (EFa [2018] No 33)’.

(510)

The company at issue did not fall under any of the exempted categories set by Article 6 of the Interim Regulations of the People’s Republic of China on Urban Land Use Tax (Revised in 2019).

(511)

Furthermore, the same company was totally exempted from the payment of the land use tax in the first quarter of 2020 based on ‘Notice of General Office of Hubei Provincial People’s Government on Printing and Distributing the Relevant Policies and Measures for Coping with COVID-19 Situation and Supporting Small and Medium-sized Enterprises to Tide Over the Difficulties’ (EZhengBanFa (2020) No 5) and ‘Notice of Hubei Provincial People’s Government on Printing and Distributing the Relevant Policies and Measures for Speeding up Development of Economy and Society in Hubei Province’ (EZhengBanFa (2020) No 6).

(512)

The Commission considered that the land use tax reduction for high-tech companies described above is a subsidy within the meaning of either Article 3(1)(a)(i) or Article 3(1)(a)(ii), and Article 3(2) of the basic Regulation because there is a financial contribution in the form of either direct transfer of funds (refund of the tax paid) or revenue foregone by the GOC (the non-paid tax) that confers a benefit to the company concerned. The subsidy is specific as it targets only high-tech companies.

(513)

The benefit for the recipients is equal to the amount refunded/tax saving. This subsidy is specific within the meaning of Article 4(2)(a) of the basic Regulation as the company received a tax reduction although it did not fit into any of the objective criteria mentioned in recital (507).

(514)

As regards the land use tax exemption in the first quarter of 2020, the Commission considered that the measure is not specific in the meaning of Article 4(2)(a) of the basic Regulation as, in view of the COVID-pandemic, this tax exemption was not limited to a specific enterprise or industry or group, of enterprises or industries, but was applied to all industries.

(515)

The amount of countervailable subsidy was calculated in terms of the benefit conferred on the recipients during the investigation period. This benefit was considered to be the refunded amount during the investigation period. The amount of subsidy established for this specific scheme was negligible for the FTT Group.

(516)

The total subsidy rate established with regard to all tax schemes during the investigation period for the sampled exporting producers was as follows:

Tax exemptions and reductions