(1)

On 13 May 2016, the European Commission (‘the Commission’) initiated an anti- subsidy investigation with regard to imports into the Union of certain hot-rolled flat products of iron, non-alloy or other alloy steel originating in the People's Republic of China (‘the PRC’ or ‘the country concerned’). The initiation was based on Article 10 of Council Regulation (EC) 597/2009 of 11 June 2009 on protection against subsidised imports from countries not members of the European Community (2). It published a Notice of Initiation in the Official Journal of the European Union (‘Notice of Initiation’) (3).

(2)

The Commission initiated the investigation following a complaint lodged on 31 March 2016 by the European Steel Association (‘Eurofer’ or ‘the complainant’) on behalf of Union producers representing more than 90 % of the total Union production of certain hot-rolled flat products of iron, non-alloy or other alloy steel (‘HRF’). The complaint contained evidence of subsidisation and of a resulting threat of 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’) (4) that it had received a properly documented complaint, and invited the GOC for consultations in accordance with Article 10(7) of the basic Regulation. The GOC accepted the offer for consultations, which were held on 11 May 2016. During the consultations, due note was taken of the comments submitted by the GOC. However, no mutually agreed solution could be reached.

(4)

A few months before the initiation of the present investigation, the Commission initiated, on 13 February 2016 (5), an anti-dumping investigation on imports of the same product originating in the PRC (‘the parallel anti-dumping investigation’).

(5)

Shortly after the initiation of the present investigation, the Commission also initiated on 7 July 2016 (6), an anti-dumping investigation on imports of the same product originating in Brazil, Iran, Russia, Serbia and Ukraine.

(6)

On 5 April 2017 the Commission imposed a definitive anti-dumping duty on imports of the same product originating in the PRC (7) (‘the anti-dumping Regulation’). The injury, causation and Union interest analyses performed in the present anti-subsidy and the parallel anti-dumping investigation are similar, since the definition of the Union industry, the representative Union producers and the investigation period are the same in both investigations. They have been up-dated and complemented in order to take account of all factual elements brought forward in the present investigation.

(7)

The GOC argued that the filing of an anti-dumping complaint against the same product from five countries on the basis of the existence of material injury within less than two months of the filing of the present complaint based on a threat of injury raises serious questions as to whether the present anti-subsidy investigation should have been initiated.

(8)

The Commission noted that the anti-subsidy case against the PRC and the anti-dumping case against the same product from five other countries are two separate investigations that must be assessed on their own merits. First, the two cases have different investigation periods, which only partially overlap (the second half of 2015). Second, the anti-subsidy complaint was based on a threat of injury to the Union industry whereas the subsequent anti-dumping complaint was based on the existence of injury to the Union industry. In this respect, the Commission recalled that the determination of dumping and injury is made on the basis of an investigation period defined in line with the relevant legal provisions and announced in the Notice of Initiation for each of the two cases. Moreover, without prejudice to the results of the ongoing anti-dumping investigation concerning the other five countries, recitals (549) to (551) show that the sufficient evidence available at the time of initiation has not been invalidated by the evidence found during the investigation.

(9)

The Commission thus rejected this claim as unfounded.

(10)

The GOC also claimed that the investigation should be terminated 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 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.

(11)

The evidence submitted in the complaint constituted the information reasonably available to the complainant. It was also sufficient to show, at initiation stage, that the alleged subsidies were countervailable in terms of their existence, amount and nature. The complaint also contained sufficient evidence that there was a threat of injury to the Union industry, which was caused by the subsidised imports. The complaint consists of 166 pages, in which it describes the evidence contained in the 117 annexes. Insofar as the GOC pointed to any deficiencies with respect to the accuracy and adequacy of the complaint, the Commission examined these during the investigation, but found no reason to exclude any of the prima facie claims about the existence and extent of subsidisation when initiating the investigation.

(12)

After disclosure, the GOC repeated its claim, but provided no additional grounds to substantiate it. Thus, the Commission maintained its position as described in the recital above.

(13)

The investigation of subsidisation and injury covered the period from 1 January 2015 to 31 December 2015 (‘the investigation period’ or ‘IP’). The examination of trends relevant for the assessment of injury covered the period from 1 January 2012 to 31 December 2015 (‘the period considered’) as well as relevant post IP developments.

(14)

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

(15)

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.

(16)

In the Notice of Initiation, the Commission stated that it might sample the interested parties in accordance with Article 27 of the basic Regulation.

(17)

In the Notice of Initiation, the Commission stated that it had provisionally selected a sample of Union producers. In accordance with Article 27(1)(b) of the basic Regulation, the Commission selected a sample on the basis of the highest representative production and sales volumes, which could reasonably be investigated within the time available. The sample also represented a broad geographical spread. The Commission invited interested parties to comment on the provisional sample, but no comments were received.

(18)

As a result, the final sample consisted of six Union producers located in five different Member States. It accounted for over 45 % of Union production.

(19)

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

(20)

One unrelated importer came forward and an importer questionnaire was sent to this importer.

(21)

However, even though the Commission contacted him in an effort to gather relevant information, the unrelated importer only provided an incomplete questionnaire reply.

(22)

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

(23)

Nine exporting producers / group(s) of exporting producers in the country concerned provided the requested information and agreed to be included in the sample. In accordance with Article 27(1)(b) of the basic Regulation, the Commission selected the following sample of four 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:

(24)

The sampled groups of exporting producers represented 68 % of the total imports of the product concerned to the Union.

(25)

In accordance with Article 27(2) of the basic Regulation, all known exporting producers concerned, and the GOC, were consulted on the selection of the sample. Comments on the proposed sample were received from the complainant and two exporting producers, one included, one not included in the sample.

(26)

The complainant argued that the proposed sample does not reflect the Chinese HRF industry to be investigated. More specifically, the complainant claimed that the Commission should base its sample not only on the volume of the exports, but also on the inclusion of the full range of subsidies set out in the complaint. In this respect, the complainant considered that two of the sampled companies were not representative recipients of countervailable subsidies.

(27)

The Commission observed that the criterion it used for selecting the sample is Article 27(1)(b) of the basic Regulation. According to that provision, the Commission bases the selection on the largest representative volume exported to the Union. The fact that an individual company might not be eligible for a specific type of an alleged subsidy does not render the sample non-representative, as the purpose of the sample is to represent the overall HRF industry in the PRC with regard to eligibility for all types of alleged subsidies. The four sampled groups of exporting producers are representative, in terms of eligibility for the subsidies alleged in the complaint, as the Commission has analysed in a note to the file available in the non-confidential file. Hence, the Commission considered that the selected sample represented a proper basis to examine the existence and the extent of the alleged subsidisation, and complies with Article 27(1)(b) of the basic Regulation.

(28)

After disclosure, the complainant insisted that the Commission should have used Article 27(1)(a) instead of Article 27(1)(b) of the basic Regulation for selecting the sample, as this would have allowed to better reflect the subsidy programmes in place. As explained in the previous recital, the Commission considered that the four sampled groups of exporting producers were representative not only in terms of volume, but also in terms of their eligibility for the subsidies alleged in the complaint as well as the subsidy practices investigated as per the Notice of Initiation. Therefore, this claim was rejected.

(29)

The first exporting producer, which was sampled, enquired about the reasons for deviating from the sample proposed for the parallel anti-dumping investigation. The Commission recalled that the anti-dumping and the anti-subsidy investigations constitute two separate investigations having a different purpose. In the anti-dumping investigation, the Commission determines whether there is dumping or not (i.e. objective price discrimination), i.e. a binary question. The finding of dumping can be extrapolated from the sample to all other companies. In the anti-subsidy investigation, the Commission establishes the amount of the subsidisation per unit exported of the product concerned. Only those subsidies that are found in the sampled companies can be countervailed. Hence, in order to ensure the effectiveness of the investigation and the protection of the Union industry, the Commission considered that it was appropriate to cover a larger volume of exports in the anti-subsidy investigation than in the antidumping investigation, so as to ensure that the sample is representative of the eligibility for the subsidies alleged in the complaint as well as the subsidy practices mentioned in the Notice of Initiation. The extended sample for the anti-subsidy investigation covers a proper scope of eligibility for the subsidisation alleged in the complaint. Three of the four sampled companies were included in the sample of the parallel anti-dumping investigation. The inclusion of an additional company within the sample was based on the consideration that it was the next largest company in terms of volume, and that it ensured representativity of the sample in terms of eligibility for the subsidies alleged in the complaint.

(30)

The second exporting producer, which was not sampled, requested to be added to the sample, or to receive an individual examination, arguing that the selected sample would not fairly represent its particularities. The arguments put forward referred to the production and export of high speed steel and tool steel, which according to it has different product characteristics and a different pricing. The criterion used for selecting the sample is the largest representative volume of exports of the product concerned. However, the exporting producer which requested to be included has significantly less export volumes of the product concerned than the proposed companies. It was therefore not possible to include it in the sample, which is why its claim to be included therein was rejected. In any event, the Commission decided subsequently to exclude high speed steel and tool steel from the scope of the product concerned, thus eliminating the company's entire production from the scope of the investigation. As a result, the company was not considered to be an exporting producer of the product concerned anymore and its request for individual examination became inadmissible, because it is no longer an interested party.

(31)

The proposed sample hence complies with Article 27(1)(b) of the basic Regulation. The Commission therefore decided to retain the proposed sample as the final sample.

(32)

A questionnaire was sent to the GOC. It included specific questionnaires for the China Development Bank, Agricultural Development Bank of China, Export Import Bank of China ‘EXIM’), Agricultural Bank of China (‘ABC’), Bank of China (‘BOC’), China Construction Bank (‘CCB’) and Industrial and Commercial Bank of China (‘ICBC’). Those banks had been specifically referred to in the complaint as public bodies or bodies directed and entrusted granting subsidies. In addition, the GOC was asked to forward that specific questionnaire for financial institutions to any other financial institution which is fully or partially owned by the GOC (‘state-owned banks’). Furthermore, the questionnaire for the GOC included specific questionnaires for those producers of iron ore, coke and coking coal which are partially or fully State-owned (‘SOEs’). Questionnaires were also sent to the four sampled groups of exporting producers, to the sampled Union producers, as well as to all related importers, the unrelated importer that had come forward, and two users that had come forward.

(33)

The Commission received questionnaire replies from the GOC. Those comprised replies to the specific questionnaire from EXIM, ABC, BOC, CCB, and ICBC. The Commission also received questionnaire replies from the four sampled groups of exporting producers, from the sampled Union producers, from the unrelated importer, and from one user.

(34)

The Commission sought and verified all information deemed necessary for the determination of subsidy, resulting threat of injury and Union interest. A verification visit took place at the premises the Chinese Ministry of Commerce, during which officials from other relevant ministries also participated. Moreover, representatives from the following financial institutions were present during this verification visit:

(35)

Moreover, verification visits pursuant to Article 26 of the basic Regulation were carried out at the premises of the following companies:

(36)

On 13 February 2017, the Commission informed all interested parties that no provisional countervailing duties would be imposed on imports into the Union of certain hot-rolled flat products of iron, non-alloy or other alloy steel originating in the PRC.

(37)

The Commission continued seeking and verifying all information it deemed necessary for its definitive findings, indicating the issues that needed to be further investigated.

(38)

On 28 April 2017, the Commission disclosed to all parties 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 into the Union, and invited all parties to comment within 17 days. Through such disclosures, the Commission also informed interested parties of the results of its verification visits, including the instances where the Commission had to use best facts available. Moreover, on 18 May, the Commission sent an additional note to the file to all interested parties, explaining in more detail its reasoning on the calculation of benefit for preferential lending. Comments were received within the set deadline of 5 days and dealt with accordingly.

(39)

Hot-rolled flat steel products are produced through a metal forming process in which hot metal is passed through one or more pairs of hot rolls to reduce the thickness and to make the thickness uniform, whereby the temperature of the metal is above its recrystallization temperature. They can be delivered in various forms: in coils (oiled or not oiled, pickled or not pickled), in cut lengths (sheet) or narrow strips.

(40)

There are two main uses of the hot-rolled flat steel products. First, they are the primary material for the production of various value added downstream steel products, starting with cold-rolled (8) flat and coated steel products. Second, they are used as an industrial input purchased by end users for a variety of applications, including in construction (production of steel tubes), shipbuilding, gas containers, cars, pressure vessels and energy pipelines.

(41)

One exporting producer (Jiangsu Tiangong Tools Company Limited) requested on 26 June 2016 that certain types of hot-rolled flat steel products, known in the industry as tool steel and high-speed steel, should be excluded from the product scope. It claimed that tool steel and high-speed steel have significantly different properties, prices, different specifications and uses.

(42)

In this respect, the Commission found during the parallel anti-dumping investigation that there are indeed major physical and chemical differences between other types of the product concerned than tool steel and high-speed steel on the one hand, and tool steel and high-speed steel on the other hand. There are several chemical elements inherently present in tool steel and high-speed steel, which are not found in the product concerned. Furthermore, there are differences in the production process, different uses and significant price differences between tool steel and high-speed steel on the one hand and other types of the product concerned.

(43)

The Commission thus excluded tool steel and high-speed steel from the product scope of the parallel anti-dumping investigation.

(44)

Based on the above considerations the Commission decided to exclude tool steel and high-speed steel also from the product scope of this investigation.

(45)

The product concerned is thus defined as certain flat-rolled products of iron, non-alloy steel or other alloy steel, whether or not in coils (including ‘cut-to-length’ and ‘narrow strip’ products), not further worked than hot-rolled, not clad, plated or coated originating in the People's Republic of China.

The product concerned does not include:

The product concerned is currently falling within CN codes 7208 10 00, 7208 25 00, 7208 26 00, 7208 27 00, 7208 36 00, 7208 37 00, 7208 38 00, 7208 39 00, 7208 40 00, 7208 52 10, 7208 52 99, 7208 53 10, 7208 53 90, 7208 54 00, 7211 13 00, 7211 14 00, 7211 19 00, ex 7225 19 10, 7225 30 90, ex 7225 40 60, 7225 40 90, ex 7226 19 10, 7226 91 91 and 7226 91 99.

(46)

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

(47)

Therefore, they are considered as alike within the meaning of Article 2(c) of the basic Regulation.

(48)

Before analysing the alleged subsidisation in the form of specific subsidies or subsidy programmes (sections 3.4 and following below) the Commission assessed government plans, projects and other documents, which were relevant for more than one of the subsidies or subsidy programmes. It found that all subsidies or subsidy programmes under assessment form part of the implementation of the GOC's central planning for the following reasons.

(49)

The 12th Five Year Plan for National Economic and Social Development of the PRC (‘the 12th Five Year Plan’) highlights the strategic vision of the GOC for improvement and promotion of key industries. In particular, chapter 9 of the 12th Five Year Plan, which concerns the transformation and upgrade of the manufacturing industry, calls for the transformation and upgrading of key existing industries to increase the competitiveness of China's industrial core. It indicates that the GOC will formulate policies to support the technical improvement of enterprises in order to improve market competitiveness. The steel industry figures prominently among these key industries.

(50)

The 12th Five Year Plan also attaches great importance to resource conservation and environmental protection, as well as to the development of a circular economy and low carbon technologies targets. In this respect, chapter 9 of the 12th Five Year Plan states that the steel industry should make progress in integrated resources utilization, energy conservation and emission reduction, and that the GOC will support such environmentally friendly development efforts.

(51)

The GOC has also issued a specific plan for the steel industry, i.e. the 12th Five Year Plan for the Steel Industry (‘the 12th Five Year Steel Plan’). That Plan highlights that the steel industry is an important basic industry of the national economy. The main priority for the GOC in the period 2011-2015 is the structural adjustment, transformation and upgrade of the steel industry. In addition, chapter 5 of the 12th Five Year Steel Plan emphasizes the importance of ‘strengthen[ing] the connection of fiscal, financial, trade, land, energy saving, environmental protection, safety and other policies with the steel industrial policy’.

(52)

The GOC claimed that the Commission could not rely on the 12th Five Year Plan and the 12th Five Year Steel Plan for its investigation, as those plans expired on 31 December 2015. Hence, there would be no legal basis for continued subsidization. The Commission noted that the 12th Five Year Plan and the 12th Five Year Steel Plan covered the investigation period. In addition, in March 2016, the 13th Five Year Plan was released, which covers the period 2016-2020. As explained in the following recital, the 13th Five Year Plan builds on the objectives highlighted in the 12th Five Year Plan and develops them further. Hence, there is continuity in promoting the development of the steel industry.

(53)

The 13th Five Year Plan further emphasizes the role of technological innovation in the economic development of the PRC, as well as the continued importance of ‘green’ development principles. According to its chapter 5, one of the main development lines is to promote the upgrading of the traditional industrial structure, as was already the case in the 12th Five Year Plan. This idea is further elaborated in chapter 22, which explains the strategy to modernize the traditional industry in the PRC by promoting its technological conversion. In this respect, the 13th Five Year Plan states that companies will be supported to ‘comprehensively improve in areas such as product technology, industrial equipment, environmental protection and energy efficiency’. Environmental protection is further elaborated in chapter 44. According to this chapter, a clean production ‘renovation’ will be implemented in key industries, and box 16 specifically refers to the steel industry in this respect.

(54)

The ‘Steel Industry Adjustment and Upgrading plan for 2016-2020’ (the 13th Five Year Steel Plan) was released in November 2016. It is based on the 13th Five Year Plan. It states that the steel industry is ‘an important, fundamental sector of the Chinese economy, a national cornerstone’ (9). That plan further elaborates on the principles of technological innovation, structural adjustment and green development mentioned in the 13th Five Year Plan, links them to more specific priorities within the steel industry (see chapter IV — Main tasks), and makes the link with various fiscal and financial support measures (see chapter V — Safeguard measures).

(55)

The GOC also claimed that these plans issue only policy guidance and, thus, they are not mandatory or binding. However, the introduction to the 12th Five Year Plan states: ‘This Plan, upon deliberation and approval by the National People's Congress, bears legal validity.’ Chapter 17 of the 13th Five Year Plan states: ‘The national development strategy and plan will come into play with a leading and constraining role.’ (10) Finally, the 13th Five Year Steel Plan states that ‘all local authorities in charge of the steel industry shall … implement the tasks and policy measures set out in the present plan’. At the level of individual companies, ‘relevant enterprises shall ensure convergence with the present plan's main objectives and priority tasks’ (11). Thus, rather than making only general statements of encouragement, these plans are binding. The GOC reiterated its position after disclosure, but did not provide any additional evidence to substantiate why the above-mentioned language would constitute only policy guidance, despite the clear wording indicating the opposite. Rather, the GOC cited specific language in these plans, which is more policy-oriented, but which does not contradict the findings on their legally binding nature. The Commission thus maintained its position that these plans are legally binding.

(56)

The following documents also identify the steel industry as a strategic, prioritized and/or encouraged industry:

(57)

After disclosure, the GOC quoted from Decision No. 40 that encouraged industries should receive credit support ‘according to the credit principles’. According to the GOC it cannot be inferred that such support should be given on a preferential basis. However, the investigation has shown that the vague term ‘credit principles’ does not mean market-based and commercial behaviour, but rather that those credit principles include important public policy considerations, which override credit risk assessment or lead to a complete absence of any risk assessment. Furthermore, the sampled companies benefited from preferential lending policies where a proper credit risk assessment is effectively absent, as explained in section 3.4 below. The Commission therefore rejected the GOC's assertion that lending to the steel industry was done on market based and commercial terms, and that the reference ‘according to the credit principles’ would constitute an obligation to follow those terms. The key point remains that according to Decision No 40, all financial institutions shall provide credit to encouraged industries, which includes the steel industry, and that that support is de facto provided on preferential terms disregarding the actual credit risk of the beneficiaries.

(58)

The GOC further commented that the National Outline for the Medium and Long-term Science and Technology Development (2006-2020) does not establish eligibility of steel producers for the alleged subsidies. However, chapter III.5 of this document clearly mentions the steel industry in connection with priority theme No 29, called ‘Cyclic Iron and Steel Flow Process and Equipment’ and chapter VIII encourages financial and fiscal support to these priority themes. This claim was therefore rejected.

(59)

Upon disclosure, the complainant asked the Commission to expand its analysis of the central plan to include the non-enforcement of bankruptcy law. It argued that figures between 2008 and 2015 show a ‘strikingly low’ number of bankruptcies in China and cited a bail-out agreement between several Chinese banks and the bankrupt steel trader Sinosteel from December 2016. Furthermore, it made reference to the findings of the IMF's report ‘Resolving China's Corporate Debt Problem’ (15), identifying a number of reasons for the low insolvency rate in China. The Commission accepted that the complainant had reported in its complaint a number of important individual cases, where bankruptcy proceedings had not been started for particular steel companies in distress. However, it found that the general figures on bankruptcies in China provided upon disclosure could not be broken down with sufficient certainty to the HRF sector. In order to ascertain whether the number of insolvencies is ‘normal’ or ‘low’ a proper benchmark would have to be established for the precise number of insolvencies during the IP. Such analytical work could not be conducted in the limited time available after disclosure. In any case, the comment did not call into the question the Commission's findings in this section, but rather confirmed them.

(60)

In conclusion, the steel industry is thus regarded as a key/strategic industry, whose development is actively pursued by the GOC as a policy objective.

(61)

The Commission requested the GOC to contact seven specific state-owned banks mentioned in the complaint, as well as any other state-owned bank, to fill in a specific questionnaire. However, the GOC only contacted five of the seven state-owned banks specifically mentioned by the complainant. According to the GOC, it had no authority to demand information from the other state-owned banks, as they operate independently of the GOC. In this regard, the Commission recalled that the GOC was not requested to provide any information, but only to forward the specific questionnaire to the state-owned banks.

(62)

None of the five state-owned banks that responded to the specific questionnaire provided specific information concerning loans provided to the sampled companies, arguing that they were bound by statutory and regulatory requirements and contractual clauses with respect to the confidentiality of the information related to the sampled companies. In addition, thirty state-owned banks, which the GOC had refused to contact to fill in the specific questionnaire, did provide loans to the sampled groups of exporting producers. The Agricultural Development Bank of China did not provide loans to the sampled groups of exporting producers.

(63)

Therefore, the Commission asked all 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. However, all of the sampled companies declined to provide access to the data pertaining to them without providing any reasons.

(64)

As three of the sampled groups of exporting producers are fully owned by the State, the Commission also requested the GOC, as the owner of these companies, to arrange for access to the requested information. However, the GOC rejected the request of the Commission, arguing that it had no authority to instruct these three groups of exporting producers to provide the requested access.

(65)

The Commission received information on corporate structure and ownership only from the five state-owned banks mentioned in recital (34), but not from any of the other 40 financial institutions. Moreover, none of the 45 financial institutions provided any information specific to the risk assessment of the loans granted to the sampled groups of exporting producers.

(66)

Therefore, the Commission informed the GOC that it might have to resort to the use of best 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.

(67)

The GOC objected to this use of best facts available, stating that it had no authority to demand information from the financial institutions and the three state-owned groups of exporting producers.

(68)

That claim is unfounded. The Commission only requested the GOC to forward the specific questionnaire for the state-owned banks, because the GOC is best placed to have detailed information on the ownership structure of financial institutions in the PRC. The GOC could also have provided administrative support to collect the replies from the financial institutions.

(69)

Furthermore, the Commission fails to see why the GOC could not support the Commission's request for access to specific information addressed to the three state-owned sampled groups of exporting producers, especially in view of the fact that the authorization for access would in all likelihood have needed an approval at the highest level, and thus needed the involvement of GOC officials.

(70)

After disclosure, the GOC reiterated that it did not have the authority to demand the requested information from the state-owned banks and the three state-owned groups of exporting producers. The GOC also found that the request of the Commission posed an unreasonable burden on the GOC, as it was expected not only to forward the questionnaires, but also to provide administrative support to collect the replies. The Commission failed to see why sending out a questionnaire and collecting replies at a central level would have put an unreasonable burden on the GOC. As the GOC did not bring forward any other new elements, the Commission maintained its position as described in recital (68) above.

(71)

Furthermore, the GOC claimed that the Commission did not indicate which information crucial to the investigation was missing and that it did not provide any explanations on why the requested information was necessary and why the information provided by the GOC was insufficient. In fact, the Commission had already alerted the GOC in its deficiency letter of 16 November 2016 that information was missing especially in relation to questions directed at state-owned banks, and that credit risk assessments should be made available during the verification. As the requested information was still not available after verification, the Commission informed the GOC in its letter of 16 March 2017 that it might have to resort to the use of best facts available under Article 28(1) of the basic Regulation because it still had no information in relation to most of the state-owned banks which provided loans to the sampled companies, and no company-specific information on the loans provided by the cooperating banks. Therefore, the GOC was adequately notified about the nature and the insufficiency of the information to be provided.

(72)

Finally, the GOC stated that the Commission did not adequately explain why certain facts were deemed to be the best available information. The Commission disagreed with this statement. In section 3.4.1.2 below it is explained which facts available were used and why the Commission found that they were the best available information. This claim was thus rejected as unfounded.

(73)

The private group of exporting producers Jiangsu Shagang Group also objected to the use of best facts available and considered that the request to provide an authorisation for the Commission to verify its financial data held by the financial institutions imposed an unreasonable burden on it. In particular, it claimed that the company representative was neither invited to be present at the verification on the financial institutions premises nor notified of the details of such verification.

(74)

In reply to these claims, the Commission recalled that the company had only provided a short and unsubstantiated refusal to provide such an authorisation via a single-sentence e-mail dated 24 November 2016. At that time, the company neither asked about any further details of the verification at the financial institutions premises nor requested the presence of its representative at such verification. If the company had asked for it, the Commission could have provided further details and would have attempted to make arrangements for the company's representative to be present at the verification.

(75)

Therefore, the Commission had to rely partially on best facts available when examining the existence and the extent of the alleged subsidisation granted through preferential lending.

(76)

The Jiangsu Shagang Group failed to provide information on a random selection of grants for verification purposes. In addition, the Commission found evidence in the audited accounts of significant grants that were received prior to but conferring a benefit during the investigation period, and which had not been reported.

(77)

Under these circumstances, the Commission considered that it had not received crucial information relevant to this aspect of the investigation. This caused serious difficulties to arrive at an accurate and substantiated conclusion for the subsidy findings related to grants with respect to this exporting producer.

(78)

Therefore, the Commission notified the company that it would consider basing its findings partially on best facts available pursuant to Article 28(1) of the basic Regulation (i.e. as far as the information related to grants was concerned).

(79)

In the reply to the Commission's letter, the company objected to the application of Article 28(1) of the basic Regulation regarding the grants. It argued that the grants found by the Commission during the verification visit were not reported because the questionnaire did not request to report those grants which were received prior to the IP and which were not recorded as a deferred asset. In addition, it claimed that it had provided a breakdown of these grants during the verification visit.

(80)

The Commission found during the verification visit that most of the grants received prior to the IP were related to assets based on the names of the investigated subsidies. Thus, the exporting producer should have recognised these grants as deferred assets/income in accordance with the applicable accounting rules as outlined in the notes to its financial statements. Consequently the company should have reported the grants in the reply to the questionnaire, which asked to report all grants related to assets and booked as deferred income. The fact that the auditor did not qualify these grants as deferred assets does not mean that amounts received prior to the IP cannot confer a benefit during the IP, especially when no further details other than a breakdown per company was provided. Therefore, the Commission concluded that the company had neither provided the detailed information about the grants received in the IP and which were reported in the reply to the questionnaire, nor the details of the grants that were received prior to the IP, and which were found only during the verification visit to be relevant for the IP. In the absence of this detailed information the Commission could not use the information about the grants provided by the company.

(81)

Therefore, the Commission had to rely on best facts available for its findings concerning grants for this company. When investigating the company on the spot, the Commission found that this company received substantial amounts from a variety of grant programmes, and therefore, the Commission used as best facts available the highest subsidy amount for these grants found during the IP.

(82)

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

(83)

According to the information provided by the four sampled groups of exporting producers, 45 financial institutions had provided loans to them. Of these 45 financial institutions, 35 were state-owned banks. The 10 remaining financial institutions were either privately owned, or the Commission could not find any conclusive information on their ownership. However, only five state-owned banks filled in the specific questionnaire, despite a request to the GOC that covered all 35 state-owned banks. Out of the 10 remaining financial institutions, only one replied, indicating that it could not reply without having consulted the regulatory authorities. After having consulted the CBRC, this financial institution informed the Commission that it was willing to cooperate, but that the CBRC suggested to it that such cooperation should be carried out through a regulatory cooperation mechanism (i.e. an exchange of information between Chinese and EU regulators respectively rather than directly between the Commission and the bank). The Commission welcomed this offer to cooperate, but noted that it was impossible to set up such an intermediate arrangement for the remainder of the investigation. In any case, the Commission did not receive any further letter or request from the CBRC itself. In addition, the financial institution did not provide any comments on substance within the set deadline. Therefore, the Commission had to base itself on best facts available.

(84)

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. In this respect, the applicable test to establish that a State-owned undertaking is a public body is as follows (16): ‘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.’ In the present case, the conclusion that the state-owned banks are exercising governmental authority is based on formal indicia of government control and evidence that it has been exercised in a meaningful way.

(85)

The Commission sought information about State ownership as well as formal indicia of government control in the state-owned banks. It also analyzed whether control had been exercised in a meaningful way. The investigation of that exercise was impeded by the refusal of the GOC and the state-owned banks to enable the Commission to analyse the decision-making process that had led to the preferential lending.

(86)

In order to carry out this analysis, the Commission first examined information for the five state-owned banks that had filled in the specific questionnaire and allowed for verification.

(87)

The following five state-owned banks provided a questionnaire reply, which was verified on site: EXIM, ICBC, CCB, ABC, and BOC. These five state-owned banks accounted for a substantial part of the loans granted to the four sampled groups of companies during the investigation period in terms of the amounts borrowed (ranging from 50 % to 60 % for both the Hesteel Group and the Jiangsu Shagang Group, and ranging from 80 % to 95 % for both the Benxi Group and the Shougang Group).

(88)

Based on the information received in the questionnaire reply and during the verification visit, the Commission established that the GOC held, either directly or indirectly, more than 50 % of the shares in each of these financial institutions.

(89)

Concerning the formal indicia of government control of the five cooperating state-owned banks, the Commission qualified all of them as ‘key State-owned financial institutions’. In particular, the notice ‘Interim Regulations on the Board of Supervisors in Key State-owned Financial Institutions’ 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’ (17).

(90)

The Board of Supervisors of the key State-owned financial institutions is appointed according to the ‘Interim Regulations of Board of Supervisors of State-owned Key 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 banks' business activities. In addition to these generally applicable indicia, the Commission found the following with respect to the of the five state-owned banks:

(91)

EXIM was formed and operates in accordance with ‘The Notice of Establishing Export-Import Bank of China’ issued by the State Council and the Articles of Association of EXIM. The State, as 100 % shareholder of EXIM, controls EXIM by nominating the Members of its Board of Supervisors. Those Members represent the interest of the State, including policy considerations in the meetings of EXIM. There is no Board of Directors. The State directly nominates the management of EXIM. According to its website, EXIM is dedicated to supporting China's foreign trade, investment and international economic cooperation. It is committed to reinforcing financial support to key sectors and weak links in the Chinese economy to ensure sustainable and healthy economic and social development.

(92)

On the basis of chapters 8 to 10 of its Articles of Association, the GOC, through its shareholding of 69,6 %, has the power to appoint the most important positions within the management of the bank, such as the President and the Vice President, the Chairman and the Vice Chairman of the Board of Directors, the Executive Director, as well as the Chairman of the Board of Supervisors.

(93)

Moreover, according to its Articles of Association, the Board of Directors convenes shareholder's meetings, decides on the business strategy and budget of the bank, takes investment (and merger) decisions, decides on the dismissals of senior management, formulates the risk management system, and decides on the establishment of departments and branches. This non-exhaustive list of responsibilities illustrates the institutional control of the State on ICBC's daily business.

(94)

According to chapter 11 and 12 of its Articles of Association, the GOC, in its capacity of main shareholder holding 57,31 %, has the power to appoint a majority of the members on the Board of Directors, which is the executive agency of the shareholders' General Meeting carrying out the management of CCB and shall be responsible to the shareholders' meeting. The same applies for the Board of Supervisors, i.e. the supervisory body of the Bank, as provided by chapter 16 of the Articles of Association.

(95)

Moreover, according to CCB's Articles of Association, the Board of Directors decides on the budget of the bank, takes investment decisions, decides on the dismissals of the chief executive auditor and the secretary of the Board of the Directors. The 10 executive members (out of a total of 15 members) of the Board of Directors are the top management of CCB. This non-exhaustive list of responsibilities illustrates the institutional control of the State on CCB's daily business.

(96)

As mentioned in Article 134 of the Articles of Association, the GOC, in its capacity of main shareholder holding 79,62 %, has the power to appoint all of the Directors in the Board of Directors. The same applies to the Board of Supervisors according to Article 199 of the Articles of Association.

(97)

Moreover, according to ABC's Articles of Association, the Board of Directors determines the strategy of the bank, decides on the budget of the bank, takes investment decisions, appoints the President and the Board Secretary of the bank, and establishes and monitors the risk management system of the bank. This non-exhaustive list of responsibilities illustrates the institutional control of the State on ABC's daily business.

(98)

As mentioned in Article 122 of the Articles of Association, the GOC, in its capacity of main shareholder holding 64,63 %, has the power to appoint both the executive and the non-executive Directors of the bank, which constitute the Board of Directors.

(99)

Moreover, according to BOC's Articles of Association, the Board of Directors decides, inter alia, the financial institution's strategic principles, business plans and major investment plans, appoints or dismisses senior staff such as the President and Secretary of the Board, the Vice President, and other senior management personnel. The Board further decides on the implementation of resolutions at the shareholders' meeting, and approves corporate governance policies. This non-exhaustive list of responsibilities illustrates the institutional control of the State on BOC's daily business.

(100)

The Commission further sought information about whether the GOC exercised meaningful control over the conduct of the five cooperating state-owned banks with respect to their lending policies and assessment of risk, where they provided loans to the steel industry. The following regulatory documents have been taken into account in this respect:

(101)

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.

(102)

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’. With respect to EXIM, its public policy mandate is established in the notice of establishing the Import Export Bank of China as well as other public available information.

(103)

Following disclosure, the GOC indicated that special loans referred to in Article 7 of the General Rules on Loans mentioned above were eliminated in 1999 based on a Circular on Improving the Administration of Special Loans (YINFA [1999] No. 228) and that Article 15 had become irrelevant as the PBOC no longer sets the upper and lower limits of loans.

(104)

The GOC further alleged that the Commission had misinterpreted Article 34 of the Bank law. It also referred to Articles 4, 5, and 7 of the Bank law relating allegedly to the bank's autonomy, the lack of interference by entities or individuals, governments and the examination of the credibility of the borrowers. The GOC further commented that Article 34 should not be read in isolation.

(105)

The Commission acknowledged that special loans were eliminated in 1999. This does not reverse, however, the conclusions drawn about the existence of preferential lending, which is also based on other facts available which, taken on their own, are sufficient.

(106)

As for Article 15 of the General Rules on Loans, the Commission disagreed with the GOC's view. That Article provides: ‘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.’ Thus, this provision remains relevant even after the end of floor and ceiling rates. In any event, Article 38 of the Bank law still refers to limits and may at any point in time be applied.

(107)

As far as the Bank law is concerned, Articles 4, 5 and 7 belong to ‘Chapter I General provisions’ while Articles 34 and 35 belong to ‘Chapter IV Basic Rules for Loans and Other Business Operations’. Article 4 states that ‘The business operations of commercial banks shall be governed by the principles of safety, liquidity and efficiency. Commercial banks shall make their own decisions regarding their business operations, take responsibility for their own risks, assume sole responsibility for their profits and losses and exercise self-restriction. 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’. Article 7 of the Bank law relates to the examination of the creditworthiness of the borrower.

(108)

The investigation showed that Articles 4 and 7 of the Bank law are 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. The findings of this investigation did not support the claim that banks do not take government policy and plans into account while making lending decisions. It rather confirmed the contrary, as has been clearly described in recitals (121) to (128) below. Therefore, the Commission found that Article 4 of the Bank law did not prevent commercial banks from taking government industrial policy and plans into account.

(109)

The GOC also referred to Article 5 of the Bank law, deriving from it that there would be ‘no interference by local governments and government departments at various levels, public organizations or individuals in the business operations of the banks.’ However, the actual text of Article 5 of the Bank law reads as follows: ‘Commercial banks shall adhere to the principles of equality, voluntariness, fairness and good faith in business dealings with their clients’. For the Commission, this formulation does not shield banks from their duty to apply public policy considerations as set out in Article 34 of the Bank law. As set out in recitals (121) to (128) below, in view of the behaviour of the banks when providing loans to the sampled companies, this Article can therefore not be considered to contradict the interpretation of Article 34 established by the Commission.

(110)

The industrial policy of the State is established through central planning, as explained in section 3.1 above. With regards to the steel industry, chapter 5 of the 12th Five Year Steel Plan specifically provides for strengthening the connection between financial policies and the steel industrial policy. Furthermore, Chapter 5 of the 13th Five Year Steel Plan issues ‘guidance to financial institutions and private capital to support the priority tasks of the Plan’, and provides that ‘As regards enterprises having a market and being profitable, banks shall keep the demand for credit reasonable’.

(111)

Similarly, Decision No. 40 instructs all financial institutions to provide credit support specifically to ‘encouraged’ projects. As already explained in section 3.1, projects of the steel industry belong to the ‘encouraged’ category.

(112)

Following disclosure, the GOC indicated that the Commission did not explain how Decision No. 40 demonstrates that banks are required to undertake any preferential credit operations, and referred to Articles 17 and 18 of this Decision. The Commission noted that the Decision incorporates the GOC's will to actively support the development of the steel industry. The Decision also instructs all financial institutions to provide credit support only to encouraged projects (the category in which the steel projects belong) and promises the implementation of ‘other preferential policies on the encouraged projects’. On the basis of the above, banks are required to provide credit support to the steel industry under Decision No. 40. While Articles 17 and 18 of the same Decision also ask the bank to respect credit principles the Commission could not establish during the investigation that this was done in practice. 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.

(113)

Furthermore, the Guidelines of the People's Bank of China, CBRC, CSRC, and CIRC, as well as the notice ‘Several Opinions on Resolving Overcapacity’, are specifically targeted at companies in the steel sector. They state that financial institutions must fully recognize the pillar role and strategic importance of steel and coal industries and continue to give credit support to the steel companies which comply with industrial policy and which adjust and regroup themselves without increasing their production capacity. This support shall extend to the setting of interest rates and the promotion of bonds and loans for mergers and acquisitions. Furthermore, debt restructuring and debt forgiveness is promoted.

(114)

Following disclosure, the GOC stated that the Commission failed to mention any specific provisions in the above-mentioned documents which support its conclusions. The Commission highlighted that it had based its statements in the previous recital inter alia on the following passages of the notice ‘Several Opinions on Resolving Overcapacity’:

(115)

As far as the Guidelines of the People's Bank of China, CBRC, CSRC, and CIRC are concerned, the following passages are inter alia relevant:

(116)

The Green Credit Guidelines encourage financial institutions to use different credit extension and risk management policies in accordance with industry policies and depending on the environmental status of the borrower. The steel industry is seen as a primary target for the provision of loans related to environmental projects. The industry policy in this context is explained in the ‘Opinions on Strengthening Energy Saving and Emission Reduction and Accelerating Structural Adjustment in the Iron and Steel Sector’. These Opinions highlight that ‘the iron and steel industry, being the one with the biggest potential in energy conservation and emission reduction, occupies a vital position in the work of energy conservation and emission reduction. To strengthen energy conservation and emission reduction and structural adjustment is an important and major measure in transforming the development model of the iron and steel industry’. Projects related to new technologies and techniques of circular economy and energy conservation and emission reduction, such as coke dry quenching under high temperature and pressure, dry dust removal, recovery and utilization of residual heat and pressure of coal gas, and sintering flue gas desulfurization, and the ensuing ‘green’ financing are thus ‘vigorously promoted’.

(117)

The GOC submitted in its disclosure comments that the Green Credit Guidelines and the ‘Opinions on Strengthening Energy Saving and Emission Reduction and Accelerating Structural Adjustment in the Iron and Steel Sector’ similarly fail to show the existence of a binding normative framework for lending practices. In particular, the GOC referred to Article 15 of the Green Credit Guidelines, which state that ‘banking institutions shall strengthen due diligence in credit granting’.

(118)

The findings of this investigation did not support the claim that Article 15 of the Green Credit Guidelines precluded financial institutions from following government industrial policy and plans when granting loans. It rather confirmed the contrary, as has been clearly described in recitals (121) to (128) below. Therefore, this claim was rejected.

(119)

The Bank law is legally binding. The mandatory nature of the Five Year Plans has been established above at recital (55). The mandatory nature of Decision No. 40 has been established above at recital (55). The mandatory nature of the other regulatory documents is demonstrated by the supervision and evaluation clauses which they contain. The notice ‘Several Opinions on Resolving Overcapacity’ states that ‘The CBRC, the National Development and Reform Commission and the Ministry of Industry and Information Technology shall organize inspection and supervision of the implementation hereof in due course.’ Article 28 of the Green Credit Guidelines states that ‘Regulatory authorities in the banking industry shall … evaluate the effect of green credit extended by financial institutions in the banking industry in a comprehensive manner based on the status of off-site regulation and on-site inspection. The evaluation results shall be used as the important bases for the regulatory ratings, institution access, business access and performance appraisals of the senior management staff of financial institutions in the banking industry in accordance with the relevant laws and regulations’. The Guidelines of the People's Bank of China, CBRC, CSRC, and CIRC on supporting the steel and coal industries to resolve overcapacity and achieve turnaround in development state that financial institutions should strengthen communication with local government departments.

(120)

On that basis, the Commission concludes 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 the normative framework in order to exercise control in a meaningful way over the conduct of the five cooperating state-owned banks whenever those were providing loans to the steel industry.

(121)

The Commission also sought concrete proof of the exercise of control in a meaningful way on the basis of concrete loans. During the verification, the five cooperating state-owned banks pointed to Articles 4 and 5 of the Bank law, according to which they are required to make an independent assessment of a loan request. They maintained that in practice they had used sophisticated credit risk assessment policies and models when granting the loans at issue. However, no concrete examples were provided. The five cooperating state-owned banks refused to provide information, including their specific credit risk assessments, related to the sampled companies for regulatory and contractual reasons. With regard to the latter, they pointed out that without the consent of the borrower, they would breach contract by providing the information. All four groups of sampled exporting producers refused to sign a letter of consent allowing for an examination of their financial data at the bank's premises.

(122)

In the absence of concrete evidence of creditworthiness assessments, the Commission therefore examined the overall legal environment as set out above in recitals (100) to (120), in combination with the behaviour of the five cooperating state-owned banks with regard to the loans provided to the sampled companies. This behaviour contrasted with their official stance, as they were not acting like financial institutions would normally do based on a thorough market-based risk assessment.

(123)

The verification visits revealed that with the sole exception of certain loans in foreign currency and one single loan to one sampled exporting producer, loans were provided to the four groups of sampled exporting producers at interest rates close to the People's Bank of China (‘PBOC’) benchmark interest rates (18), 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 four sampled exporting producers. In addition, all of the sampled companies had received revolving loans, which allow them to immediately replace the capital repaid on loans at the maturity date by fresh capital from new loans.

(124)

In the cases of the Shougang Group and the Benxi Group, payment schedules were restructured or debt was forgiven because of financial difficulties, and the Commission found one specific example of an intervention by the GOC which led to a debt restructuring against the financial institutions' better financial judgment (19).

(125)

The Commission also found that loans which should have been reported by the banks as not normal loans had not been indicated as such in the national central credit register by the five cooperating state-owned banks. The obligation to report exists in particular when loans had been restructured, when the debtor defaulted on its payments, or when revolving loans had been issued. Such occurrences were found for all four groups of sampled exporting producers. According to the CBRC's ‘Guidelines on risk-based loan classification’, all of these instances should have been included in the central credit register. This lack of reporting by the financial institutions leads to a distorted picture of the company's credit situation in the central credit register, as the register does not show the real creditworthiness of the company. As a result, even if a financial institution were to apply a market-based risk assessment, it would have done so based on inaccurate information.

(126)

Following disclosure, the GOC submitted that the lack of reporting of some loans in the central credit register demonstrated that the legislative framework for lending practices was not binding. However, a partial non-compliance with the obligation to report certain loans by some actors does not mean that the Guidelines as such had no legal force.

(127)

Furthermore, the GOC noted that the annual reports of various Chinese banks contained extensive chapters on risk management and credit analysis, and clearly showed that loans to the steel industry had recently been restricted rather than promoted. The Commission considered that the information provided on credit risk assessment in the annual reports did not contain any new elements put forward by the GOC. In any event, those were abstract, and did not allow the assessment of individual cases, nor do they constitute proof that such assessment actually takes place. In addition, the examples provided by the GOC for EXIM and CCB merely related to a decrease in the percentage of loans provided to the steel industry. These statements did not provide any information about the conditions at which these loans were granted. In any event, in the absence of any information on the overall lending to the steel industry by all state-owned banks and private banks that are entrusted and directed, the fact that two of them have reduced their exposure is not meaningful. As for the annual report of China Merchants Bank, the statement of the GOC only referred to the fact that the bank adjusted its credit policies without any further details. Even if the China Merchants Bank ‘raised its entry standards’, the quoted reference also stated that the bank ‘supported its quality customers’.

(128)

Therefore, the Commission did not see any reason to change its findings and concluded that the GOC has exercised meaningful control over the conduct of the five cooperating state-owned banks with respect to their lending policies and assessment of risk, where they provided loans to the steel industry.

(129)

The Commission found that the legal framework set out above is being implemented by the five co-operating State-owned financial institutions in the exercise of governmental functions with respect to the steel sector, thereby acting as public bodies 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.

(130)

After disclosure, the GOC claimed that the Commission did not meet the evidentiary standards for determining that the state-owned banks were public bodies, as it allegedly relied exclusively on formal indicia of control such as the GOC's ownership or the power to appoint or nominate management officials to draw its conclusions. The Commission rejected this claim as unfounded, since it had also examined the exercise of this control in a meaningful manner in great detail in recitals (100) to (128) above.

(131)

As set out in section 3.2 above, the GOC did not request any of the other state-owned banks which provided loans to the sampled companies to return the specific questionnaire. Therefore, in line with the conclusions reached in recitals (61) to (75) above, the Commission decided to use best facts available to determine whether those state-owned banks qualify as public bodies.

(132)

Using publicly available information, such as the bank's website, annual reports, information available in bank directories or on the Internet, the Commission established that the following 30 banks that had provided loans to the four sampled groups of exporting producers were partially or fully owned by the State itself or by State-held legal persons: China Development Bank, Bank of Communications, China Everbright Bank, Postal Savings Bank, China Merchants Bank, Shanghai Pudong Development Bank, China Industrial Bank, Shenyang Rural Commercial Bank, Benxi City Commercial Bank, Benxi Commercial Bank, Kailuan Group Financial Co., Liaoning Hengyi Financing Lease Co., Ltd., Bank of Chengde, Bank of Hebei, Bank of Shanghai, Ningbo Bank, China CITIC Bank, China Guangfa Bank, China Bohai Bank, Huaxia Bank, China Resources Bank, China Zheshang Bank, China Credit Trust, Huarong International Trust Co. Ltd., Northern International Trust Co., Ltd., Zhangjiakou Bank, Hebei Iron and Steel Group Financial Co., Ltd, Shougang Group Finance, Finance Bureau of Benxi City, Zunhua Rural Credit Union. Information on the ownership structure of those banks can be found in the table below.

(133)

The Commission further established, absent specific information from the financial institutions at issue indicating otherwise, GOC ownership and control based on formal indicia for the same reasons as set out above in section 3.4.1.1. In particular, based on best facts available, managers and supervisors in those 30 state-owned banks are assumed to be appointed by the GOC and accountable to the GOC in the same manner as in the five cooperating state-owned banks.

(134)

With regard to the exercise of control in a meaningful manner, the Commission considered that the findings concerning the five cooperating financial institutions, which accounted for a substantial part of the loans to the four sampled groups of companies during the investigation period (ranging from over 50 % to almost 90 %, depending on the company) could be considered representative also for other non-cooperating state-owned financial institutions. The normative framework analysed in section 3.4.1.1(b) above applies to them in an identical manner. Absent any indication to the contrary, based on best facts available, the lack of concrete evidence of creditworthiness assessments is valid for them in the same manner as for the five cooperating state-owned banks, so that the analysis on the concrete application of the normative framework in section 3.4.1.1(b) above applies to them in an identical manner.

(135)

Moreover, the Commission observed that the majority of loan contracts which the Commission had obtained from the sampled companies had similar conditions and that the lending rates which had been agreed were similar and partly overlap with the rates provided by the five cooperating state-owned banks.

(136)

The Commission considered therefore that the findings for the five cooperating state-owned banks constituted the best facts available for assessing the 30 other state-owned banks, due to those similarities in loan conditions and lending rates and the representativeness of the five financial institutions that were verified.

(137)

On that basis, the Commission concluded that the other 30 state-owned banks which provide loans to the sampled companies are public bodies within the meaning of Articles 3 and 2(b) of the basic Regulation.

(138)

After disclosure, the GOC objected to the assessment of the formal indicia of control by the Commission, stating that the Commission had made a general country-wide assessment of all financial institutions without taking into account the core characteristics and functions of particular entities and their relationship with the government. More specifically, the GOC held that a difference should be made between financial institutions held by SOEs and those which are directly held by the GOC. As far as the country-wide assessment is concerned, the Commission noted that it had carried out a specific public-body-analysis for each of the financial institutions for which the GOC had submitted the relevant information requested. Unfortunately, the GOC did not submit information for all the other financial institutions that extended loans to the sampled cooperating exporting producers, as explained in section 3.2. The Commission was thus forced to make a public-body-analysis on the basis of best facts available.

(139)

In light of the above considerations the Commission found that all 35 state-owned Chinese financial institutions that provided loans to the four sampled groups of cooperating exporting producers are public bodies within the meaning of Articles 3 and 2(b) of the basic Regulation.

(140)

In addition, even if the state-owned financial institutions were not to be considered as public bodies, the Commission found that they would also be considered entrusted and 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 recitals (143) and (144) below. Thus, their conduct would be attributed to the GOC in any event.

(141)

The Commission then turned to the ten remaining financial institutions. The following eight financial institutions were considered to be privately owned: HSBC, Standard Chartered Bank, Ping An Bank, Australia & New Zealand Banking Group (China) Limited, Shagang Group Finance, DBS Group (China) Limited, Bank of Beijing, Hang Seng Bank. In addition, Jinfeng Rural Commercial Bank and SPB Bank were considered to be private in the absence of any publicly available information on their ownership structure. The Commission analysed whether these financial institutions had been entrusted or directed by the Government of China to grant subsidies to the steel sector within the meaning of Article 3(1)(a)(iv) of the basic Regulation.

(142)

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 (20). In both cases, the government uses a private body as proxy to effectuate 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’ (21). At the same time, paragraph (iv) does not allow Members to impose countervailing measures to products ‘whenever the government is merely exercising its general regulatory powers’ (22) 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’ (23). Rather, entrustment and direction implies ‘a more active role of the government than mere acts of encouragement’ (22).

(143)

The Commission noted that the normative framework concerning the steel industry mentioned above in recitals (100) to (120) applies to all financial institutions in the PRC, including privately owned financial institutions. To illustrate this, the notice ‘Several Opinions on Resolving Overcapacity’ is addressed to all policy banks, large banks, joint-stock banks, postal savings banks, foreign-invested banks, financial asset management companies, and other financial institutions under the management of the CBRC.

(144)

Furthermore, the verification visits in the sampled companies revealed that the majority of loan contracts which the Commission had obtained from the sampled companies had similar conditions, and that the lending rates provided by the private financial institutions were similar and partly overlapped with the rates provided by the publicly owned financial institutions.

(145)

The Commission also sent letters to these ten financial institutions with a request for further information on their loan practices and risk assessment Only one replied, indicating that it could not reply without having consulted the regulatory authorities. After having consulted the CBRC, this financial institution informed the Commission that it was willing to cooperate, but that the CBRC suggested to it that such cooperation should be carried out through a regulatory cooperation mechanism (i.e. an exchange of information between Chinese and EU regulators respectively rather than directly between the Commission and the bank). The Commission welcomed this offer to cooperate, but noted that it was impossible to set up such an intermediate arrangement for the remainder of the investigation. In any case, the Commission did not receive any further letter or request from the CBRC itself. In addition, the financial institution did not provide any comments on substance within the set deadline. Hence, none of these institutions provided any evidence contradicting the Commission's findings.

(146)

In the absence of any divergent information received from the private financial institutions, the Commission concluded that, in so far as the steel industry is concerned, all financial institutions (including private financial institutions) operating in China under the supervision of the CBRC 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 steel industry.

(147)

Following disclosure, the GOC observed that the Commission needed to clarify whether it applied the ‘entrustment’ or ‘direction’ standard, as both are mutually exclusive. Furthermore, the GOC asserted that the Commission's interpretation of entrustment or direction was too narrow, as it focused on a legal standard implying ‘a more active role of the government than mere acts of encouragement’. The GOC on the other hand maintained that the Panel in US — Export Restraints required a deeper analysis based on the existence of (i) an explicit and affirmative action, be it delegation or command, (ii) addressed to a particular party, and (iii) the object of which action is a particular task or objective. (24)

(148)

On the first point, the Commission considered that the ‘entrustment’ and ‘direction’ standards were not mutually exclusive, since in both cases, the government uses a private body as proxy to effectuate a financial contribution. Concerning the second point, the Commission disagreed with the GOC's interpretation of the legal standard to be applied. As already described in recital (142) above, the Commission based itself on subsequent WTO case law, in which the Appellate Body held that the replacement of the words ‘entrusts’ and ‘directs’ by ‘delegation’ and ‘command’ was too rigid as a standard (25) It follows that the standard of proof established by the Appellate Body in this case was less strict than the original Panel's interpretation in the US — Export Restraints case. In any event, the GOC failed to put forward any evidence or argument to rebut the Commission's findings about entrustment or direction in the sense of Article 3(1)(a)(iv) of the basic Regulation in the present investigation. This claim was therefore rejected.

(149)

As demonstrated in recitals (100) to (120), several legal documents which are specifically targeted at companies in the steel sector, direct the financial institutions to provide loans at preferential rates to the steel industry. On the basis of these documents it is demonstrated that the financial institutions only provide preferential lending to a limited number of industries/companies which comply with the relevant policies of the GOC.

(150)

The Commission therefore concluded that subsidies in the form of preferential lending are not generally available but are specific within the meaning of Article 4(2)(a) of the basic Regulation. Moreover there was no evidence submitted by any of the interested parties suggesting that the preferential lending is based on objective criteria or conditions in the sense of Article 4(2)(b) of the basic Regulation.

(151)

Following disclosure, the GOC indicated that, based on the AB report in US-Aircraft (Second Complaint), the specificity analysis should focus not only on ‘the particular recipients identified in the complaint, but … also on all enterprises or industries eligible to receive that same subsidy’ (26) and that, according to the Panel report in EC — Aircraft (27), in order to be specific, a subsidy must be provided to a sufficiently limited ‘group’ of enterprises or industries. The GOC also submitted that the Commission failed to specify which part of the documents referred to by the Commission concerns the explicit granting of preferential loans to the steel industry. In this respect, the Commission referred to the documents that were listed in recital (100) above. It considered that references to the steel industry are sufficiently clear as this industry is identified either by its name or by a clear reference to the product that it manufactures or the industry group that it belongs to. Moreover, the fact that the GOC supports a limited group of encouraged industries, including the steel industry, makes this subsidy specific.

(152)

The Commission calculated the amount of the countervailable subsidy. For this calculation it assessed the benefit conferred on the recipients during the IP. 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 pays on the government loan and the amount that the company would pay for a comparable commercial loan obtainable on the market.

(153)

In this regard, the Commission noted a number of specificities on the Chinese steel market. As explained in sections 3.4.1 to 3.4.3 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 financial market.

(154)

The sampled groups of companies differ 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 e.g. maturity, collateral, guarantees and other attached conditions. For those two reasons, each company had a different average interest rate based on its own set of loans received.

(155)

The Commission found during the investigation that the Chinese financing practices in the steel market, as shown by the four sampled groups of producers, are characterised by ‘revolving loans’, i.e. loans which allow a company to replace the capital repaid on loans at the maturity date by fresh capital from new loans. According to the Chinese guidelines on risk-based loan classification, they should be classified as so called ‘concerned’ loans, indicating that even though a borrower is currently able to repay the principal and interest of the loan, there are some factors which may negatively affect its repayment ability. However, this was not done in practice as explained above in recital (125).

(156)

The Commission assessed individually the financial situation of each sampled group of exporting producers in order to reflect these particularities. The Commission first analysed the general financial situation and the existence of revolving loans at group level. This analysis was then further extended to the individual companies in the group operating at the level of the HRF production. As a result, the Commission calculated the benefit from the preferential lending practices for each sampled group of exporting producers on an individual basis, and allocated such benefit to the product concerned.

(157)

The Jiangsu Shagang Group presented itself in a generally profitable situation during the IP, according to its own financial accounts. However, the profitability of the group was continuously weak over the period 2012-2015, indicating that minor changes in the internal or external business environment could expose the group to a loss-making situation. Its debt to assets ratio is high, but sustainable in a capital intensive industry such as the steel industry. This general perception was confirmed on-spot.

(158)

The Commission noted that the Jiangsu Shagang Group has been awarded an AAA rating by the Chinese credit rating agency China Lianhe Credit Rating Co., Ltd., for the issuance of bonds in the Chinese market.

(159)

However, the Commission also noted that a recent study published by the International Monetary Fund (28) showed significant divergences between local Chinese rating grades and international rating grades. For example, over 90 % of Chinese bonds are rated AA to AAA by local rating agencies, whereas less than 2 % of firms enjoy such top-notch ratings in the U.S. market.

(160)

This is further illustrated in the graph below taken from the study:

Inflated Bond Ratings

(In percent, share of local rating in onshore bond market by 2015)

International Rating (S&P)

China Local Rating

Sovereign rating

Source: HSBC.

Inconsistent Local and International Ratings

(161)

On this basis, even if the Jiangsu Shagang group is awarded a good credit rating by a Chinese rating agency, the Commission concluded that this rating is not reliable.

(162)

At the level of the individual companies involved in the production of HRF, losses were recorded in the accounts during the IP, but this was not a recurring situation, and other financial indicators, such as the debt to assets ratio or the interest coverage ratio did not indicate any significant structural problems regarding the companies' debt repayment abilities. However, on-spot, the Commission also found that this company received one revolving loan among the sampled loans. Moreover, in the loan tables, a significant number of short term loans was replaced with new loans for the same amount at expiry. Furthermore, one of the sampled companies in the group received a short term loan from a financial institution specialised in bad loans at a very high interest rate between 14 % and 16 %, which also indicates that it experienced liquidity issues in the IP.

(163)

This situation further confirmed the Commission's assessment to disregard the Chinese AAA rating of the Jiangsu Shagang Group as trustworthy.

(164)

Finally, a commercial paper issued by the Jiangsu Shagang Group had received a Prime-1 rating from Moody's in 2013. However, that rating was based on the rating of the Bank of China, New York Mellon branch, which had provided a guarantee, precisely because Jiangsu Shagang Group did not have a reliable and independent rating on its own.

(165)

The lending financial institutions had not carried out a creditworthiness assessment. Hence, in order to establish the benefit, the Commission had to assess whether the interest rates for the loans accorded to the Jiangsu Shagang Group were at market level.

(166)

The Commission considered that the 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.

(167)

Non-investment grade bonds are regarded as having speculative characteristics. Obligors rated at non-investment grade will likely have some quality and protective characteristics, but these may be outweighed by large uncertainties or major exposure to adverse conditions. The BB rating is the highest grade in this category, which reflects the fact that an obligor is less vulnerable in the near-term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitments according to Standard and Poor's credit rating definitions.

(168)

The premium expected on bonds issued by firms with this rating (BB) was then applied to the standard lending rate of the People's Bank of China (‘PBoC’) in order to determine the market rate.

(169)

That mark-up was determined by calculating the relative spread between the indexes of US A 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 benchmark interest rates as published by the PBoC 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.

(170)

As for loans denominated in foreign currencies in the PRC, a similar 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 with relevant denominations issued during the IP were used to determine a mark-up, which was applied to the USD LIBOR lending rate in order to determine an appropriate benchmark.

(171)

Furthermore, in order to take into account the increased risk highlighted by the revolving loan practices at the level of the individual companies involved in the HRF production, the Commission tried to identify another appropriate benchmark on the Chinese market. In this respect, the Commission noted that one state-owned bank had provided a loan with a maturity of 16 months to one of the companies of the Jiangsu Shagang Group for an interest rate between 14 % and 16 %. According to the Jiangsu Shagang Group, the comparatively high interest rate was due to the fact that this specific financial institution specializes in loans to companies in financial distress, and the company called upon its services to alleviate a temporary liquidity problem. Given that revolving loans are usually a sign of short term liquidity problems, the conditions and the maturity of that loan are considered to be appropriate to reflect the additional benefit derived from the use of revolving loans.

(172)

The Commission thus found it appropriate to use this figure as the relevant benchmark for all loans with a maturity of 2 years or less provided at the level of the production companies which were making use of revolving loans. Indeed, revolving loans are usually concluded for short durations. It is highly unlikely that a revolving loan would be found for a maturity of more than two years, and the concrete evidence of the loans verified in the sampled companies supports this conclusion.

(173)

In its disclosure comments, the GOC and the sampled cooperating companies took issue with the methodology related to the relative spread, as described in recital (169) above. In view of these comments, the Commission sent subsequently an additional document to all interested parties, in which it further explained the methodology used.

(174)

In summary, the following comments were received:

(175)

On the first point, 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 risk of default of a BB-rated company is X % more likely than default of the government or the risk-free company. This is a relative evaluation, which is illustrated by data submitted by the GOC on the historical development of spreads (see analysis below). The relative spread captures changes in the underlying market conditions which are not expressed when following an absolute spread.

(176)

On the second and third point, the Commission agreed with the starting point that interest rates reflect not only company risk profiles, but also country- and currency specific risks. 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 %).

(177)

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.

(178)

The method is 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. To further illustrate this point, the data provided by the GOC show that the relative spread was low before the bust of the dotcom-bubble in 2002. It returned to low levels until the financial and economic crisis caused by subprime and sovereign debt. Following that financial and economic crisis, the relative spreads remained at a higher level compared to before that crisis. This higher level of the relative spread reflects well worsened macro-economic fundamentals and suppressed aggregate demand, which also caused the inflation rate in the US (and other advanced economies) to fall to very low levels.

(179)

The data provided by the GOC shows that the absolute spread fails to reflect the worsened underlying fundamentals. For instance, there is a relatively small difference in the absolute yield spread in the US – 2,46 p.p. in 2003 and 2,35 p.p in the IP, even if there is a large difference in the average inflation rate – 2,27 % in 2003 and only 0,12 % 2015. The relative spread better captures the divergences in the economic situation between the two, namely 48,86 % in 2003 against 71,57 % in 2015. Similarly, in 2006 (before the crisis) the absolute spread was at 1,55 %, which is almost the same as in 2017 (1,56 %), even though the underlying market conditions have significantly changed. That change in market conditions is expressed in the relative spread, which was 27 % in 2006 and 46 % in 2017.

(180)

Finally the Commission acknowledged that using the relative spread methodology in cases of negative interest rates would produce unreasonable results. However, that scenario is not at issue in the present case. The Commission considered that during the IP the relative spread better captured the underlying market conditions affecting company-specific credit risks than using an absolute spread approach.

(181)

On the fourth point, the Commission interpreted the facts presented by the GOC in a different manner. Using the set of data provided by the GOC, it can be seen that the absolute spread is not as stable as alleged by the GOC, but instead varies over time, from 1 % to 4,5 %. In addition, the relative spread follows exactly the same trend as the absolute spread over the past 23 years, i.e. when the relative spread increases the absolute spread also increases and vice versa. As for the alleged volatility of the relative spread, the magnitude of the changes are similar — the difference between the highest and the lowest figures is 530 % for the relative spread and 450 % for the absolute spread. Finally, when applying the data provided by the GOC to the historical PBoC rates, it shows that in some years the relative methodology produces a lower benchmark than the absolute spread.

(182)

Based on the additional information document, the GOC claimed that the years 2002 and 2008 to 2010 should be taken out from the analysis because they were ‘abnormal’ years. The Commission fails to see why changes in the business cycle should be disregarded. Recessions are part of the economic life cycle and an analysis of the data should take into account all facets of this life cycle, not only the good years. This holds true also for extraordinary strong recessions, such as the economic and financial crisis 2008 to 2010.

(183)

On the fifth point, the use of the relative spread observed during the IP indeed provided results diverging from the absolute spread when it was applied more precisely at the level of different maturities instead of as an average for all loan durations. However, these diverging results were not due to the fact that the relative spread as such was erroneous, but due to the fact that there were major differences in the time structure of risk between the US and the PRC interest rates. Indeed, in the US, the difference in interest rate between a 1-year and a 10-year bond was much wider (ranging from 2,5 % to 3,7 %) than the difference between the 1-year and above 5-year interest rates of the PBoC (0,8 % difference). The divergence thus stemmed from the starting point on which the relative spread was applied. If the PRC would have had a similar time structure of risk as a starting point, then the resulting benchmark rates would have again followed a logical trend across all loan durations. For example, assuming a 3 % difference between short-term and long-term PBoC interest rates would have resulted in a benchmark rate of 15,81 % for long-term loans, which is higher than the 14,22 % benchmark for short-term loans.

(184)

The Commission recognized this issue from the outset. In order to minimize the impact of differences in time structure of risk between the two countries, the Commission decided to use the average relative spread for all loan durations, thus bringing the international benchmark closer to Chinese conditions and avoiding penalization of Chinese companies having a high proportion of short-term loans.

(185)

On the sixth point, the Commission disagreed with the GOC's claims. The claim that the Commission only used the relative spread for long-term loans is factually incorrect. The methodology of the relative spread was used for both long-term and short-term loans. Using a single average relative spread for loans with different maturities did not assign too much weight to short-term maturities, as the Commission in practice applied this spread to loans with various maturities.

(186)

On the seventh point, the Commission recognized that it had used data from two different time periods, i.e. the relative spread applicable during the IP and the PBoC rate applicable at the time when the loan was granted, and that the time period considered for each loan should match. However, the Commission disagreed with the GOC's conclusion that all data should have been taken from the IP instead. In this respect, the Commission noted that the specific conditions attached to each loan, such as for example the variability of the interest rate, should be taken into account when determining the correct time period to be used for the spread as well as for the PBoC rate. However, in the present investigation, this information was not available to the Commission for all loans granted to the sampled companies. In view of the absence of information on the specific conditions of the loans granted in the past, and upon GOC's request, the Commission decided that it would use the relative spread and the PBoC rate applicable during the IP for all loans granted to the sampled companies for this investigation. The Commission adjusted downward the amount of benefit related to preferential lending accordingly.

(187)

Finally, on the last point, the Commission agreed that the sources referred to in the additional information document referred to the use of a relative spread with regards to yields and that none of the sources stated that this difference needed to be expressed in a relative way. The Commission pointed to the fact that the aim of the relative spread exercise was to construct a credit risk premium, to be applied to the risk-free rate in order to arrive at a benchmark interest rate. Credit risk premiums are indeed related to how investors view securities, and what is the yield they expect to receive in return for the increased risk. Furthermore, even though not all sources were based on scholarly books, they did echo the references made in other sources. For all these reasons, the Commission still viewed all of these sources as being relevant.

(188)

The Commission thus maintained it position that the relative spread method reflects more adequately the risk premium that a financial institution would apply to the Chinese exporting producers in a non-distorted market, in particular given that the base interest rate in the PRC and the base interest rate in the US have evolved differently over time.

(189)

Furthermore, following disclosure, the GOC and two sampled companies also objected to the use of an interest rate between 14 % and 16 % for all loans with a maturity of 2 years or less at the level of the companies which were making use of revolving loans. The following comments were received:

(190)

On the first point, the Commission did not classify all loans with a duration of two years and less as revolving loans. The existence of revolving loans in a given company was merely considered an indication that the company was in a worse financial situation than what the financial statements would suggest at first sight, and that the additional risk was related to short-term liquidity problems. Therefore, all short-term loans had to be given a higher risk premium, whether such loans were revolving or not.

(191)

Concerning the second point, the Commission disagreed with the assessment made by the GOC and the exporting producers. The Chinese authorities themselves consider revolving loans to be an additional factor of credit risk. As stated in the CBRC's ‘Guidelines on risk-based loan classification’, revolving loans should be reported at least as a ‘concerned’ loan (29). A loan falling under this category means that even though a borrower can pay the principal and interest of the loan now, there are some factors which may negatively affect the repayment thereof.

(192)

Revolving credit facilities do indeed exist in Europe and have been used by the Union steel industry, but their terms and conditions are very different from the Chinese revolving loans. Revolving credit facilities in the Union are basically credit lines, with a pre-determined maximum amount that can be withdrawn and repaid on several occasions during a pre-specified time period. In addition, contrary to what the GOC claims, such credit facilities entail an additional cost, be it a contractual margin on top of the usual short-term market rates (30), or a predetermined management fee. Furthermore, the example of BNP Paribas provided by the GOC also foresaw a fee for unused capital over the duration of the credit facility. On the other hand, the revolving loans found during the verification visits at the Chinese sampled companies did not have conditions different from other short-term loans. They were not labeled as being a credit line or a revolving credit facility and there were no extra fees or margins attached to it. At first sight, they appeared to be normal short-term loans. However, when verifying the repayments of such loans during the verification visit, it became clear that the capital amount was actually being repaid by fresh loans received from the same bank for the same amount within a week before or after the maturity date of the initial loan. The Commission then extended its analysis to the other loans in the loan tables and found in most cases other instances with exactly the same characteristics. For all these reasons, the Commission maintained its position on revolving loans.

(193)

The Commission disagreed on the facts of the specific claim of the Shougang Group that the Commission identified revolving loans mainly for the companies Qian'an Coal, Xishan Coking and Shougang Corp. The Commission identified revolving loans in all of the verified companies of the Shougang Group, including in the production companies Shougang Mining and Qian'an, where all of the short-term loans granted during the IP were considered to be revolving loans.

(194)

Finally, on the third point, the Commission considered that the loan provided to the company in the Jiangsu Shagang Group was a comparable commercial loan as the conditions for granting it, described in recital (162) above, corresponded to a financial situation characterized by short-term liquidity issues. In addition, the maturity of the proxy loan (16 months) generally corresponded to the short-term nature of the loans on which this proxy benchmark was applied for the benefit calculation. Nevertheless, the proxy benchmark rate was adjusted to take into account interest rate differences for loans with a maturity of less than one year compared to loans with a maturity of one to two years, based on the respective differences between the two maturities in the PBoC rates. The detailed calculation of this adjustment was provided to the companies concerned.

(195)

The Commission therefore rejected all claims related to the use of an interest rate between 14 % and-16 % for all loans with a maturity of 2 years or less at the level of the companies which were making use of revolving loans.

(196)

In addition, the Jiangsu Shagang group criticised that the Commission double counted loans borrowed by its subsidiaries from Shagang Finance and the parent company in its calculation of the benefit. Shagang also claimed that the Commission should have subtracted the ‘negative benefit’ i.e. the benefit on the loans for which the actual interest payments were higher than the calculated benchmark rates by the Commission. The Commission rejected both claims.

(197)

Regarding the alleged double counting, the Commission noted that Shagang had mainly referred to inter-company loans between Shagang Finance and related steel producing companies. In this respect, it recalled that Shagang Finance had not provided any information on loans taken by itself to the Commission. Moreover, the Commission did not calculate any benefit at the level of Shagang Finance. This excludes any possibility of double counting. With respect to the few remaining inter-company loans between the Shagang Group and the steel producing companies, the Commission verified whether double counting had actually occurred. However, already before disclosure the loan-sheet received from Shagang Group had only indicated two loans as inter-company loans, whereas the loan-sheet of Hongchang Plate only indicated one such loan. Moreover, even when comparing these loans on substance, they did not match in terms of borrowed amount, duration and applicable interest. The company did not provide any new information after disclosure to substantiate its claim that those loans were in reality corresponding. Therefore, the Commission considered that each of these loans was reported only once, either on the group or on the producing company list of loans.

(198)

Regarding the claim related to the ‘negative benefit’ referred to in recital (196), the Commission observed that no issue of fair comparison arises. In particular, the receipt of a loan at a non-preferential rate cannot offset the benefit received from another loan received with a preferential rate. The Commission only took into account the loans for which the calculated benchmark was higher than the interest rate paid by the companies when calculating the benefit. This claim was therefore rejected.

(199)

The Hesteel Group also presented itself in a generally profitable financial situation according to its own financial accounts. It was not loss-making, but profitability levels were generally weak, which exposes the group to adverse changes in business, financial, or economic conditions. The group also has a high debt to asset ratio.

(200)

At the level of the companies involved in the production of HRF, the general financial situation was presented in a similar way to the group level, with low profitability levels but no losses. Furthermore, other financial indicators, such as the debt to assets ratio or the interest coverage ratio did not indicate any significant structural problems regarding the companies' debt repayment abilities. However, on-spot, the Commission found that 80 % of the sampled loans examined received by these companies were revolving and were substantial in amount, pointing to a more fragile situation in terms of liquidity than the financial statements would lead to believe.

(201)

The Commission noted that the Hesteel Group was awarded an AAA- rating by a Chinese credit rating agency, the Agricultural Bank of China Hangang Sub-branch. For the same reasons as set out in recitals (159) to (161) above, the Commission concluded that this rating is not reliable. Furthermore, the existence of the revolving loans further confirmed the Commission's assessment to disregard the Chinese AAA- rating of the Hesteel Group.

(202)

The Commission therefore considered that it is appropriate to use the BB benchmark as set out in recitals (166) to (168) above at the level of the group activities to calculate the overall benefit conferred upon HFR derived from the absence of a proper risk assessment.

(203)

In addition, in order to take into account the increased risk highlighted by the existence of revolving loans at the level of the individual companies involved in the HRF production, and given that the conditions and the maturity of these loans were essentially comparable to the high interest loan mentioned in recital (162) above, the Commission found it appropriate to use the same benchmark as set out in that recital as the relevant benchmark for all loans with a maturity of 2 years or less provided at the level of the production companies which were making use of revolving loans. As revolving loans are usually concluded for short durations, it is highly unlikely that a revolving loan would be found for a maturity of more than two years, and the concrete evidence of the loans verified in the sampled companies supports this conclusion.

(204)

The claims and arguments put forward by the GOC and some sampled companies with regard to the general methodology for the relative spread and the use of a proxy benchmark apply equally to the Hesteel Group. The Commission rebutted these points already in in recitals (175) to (195).

(205)

Upon disclosure, the complainant wondered whether the Commission had taken into account a significant capital injection of circa 1 billion Euro to Hesteel in 2010, still conferring benefits to this group in the IP. The Commission observed that this alleged capital injection was subject to a question in April 2017 from the United States and the EU to the PRC within the framework of the Committee on Subsidies and Countervailing Measures of the WTO. The Commission did not find any evidence during this investigation that this alleged capital injection had conferred any benefit to Hesteel Group during the IP.

(206)

The Shougang Group presented itself in a generally difficult financial situation according to its own financial accounts. Based on the evidence received for the years 2014 and onwards, the Group was loss-making both in 2014 and 2015. It was highly leveraged and it increased its short-term liabilities by more than 10 % during the IP. Furthermore, 25 revolving loans were found on-spot during the verification at the level of the parent company. Moreover, in the loan tables, a significant number of additional short term loans was replaced with new loans for the same amount at expiry.

(207)

At the level of the companies involved in the production of HRF, the financial statements as well as evidence found relating to specific loans, in asset evaluation and feasibility reports, showed that these companies were operating as a going concern despite consecutive years of losses or marginal profits, high debt to assets ratios, low interest coverage, worsening financial indicators and an uncertain outlook for the future. These companies did not generate enough operating profit to cover the payment of their interest expenses for several consecutive years during the period 2012-2015. Furthermore, the Commission found instances of debt restructuring due to payment difficulties during the verification. In addition, all of the short-term loans granted during the IP to one of the production companies were revolving loans.

(208)

Despite these circumstances, the Shougang Group was awarded an AAA credit rating by a Chinese credit rating agency, Dagong International. For the same reasons as set out in recitals (159) to (161) above, as well as the evidence found during the verification, the Commission disregarded the Chinese rating of the Shougang Group.

(209)

In view of the above general situation, the Commission found it necessary to find an appropriate benchmark at the level of the group. In order to take into account the increased risk highlighted by the existence of revolving loans, and given that the conditions and the maturity of these loans were essentially comparable to the high interest loan mentioned in recital (162) above, the Commission used the same benchmark as set out in that recital for all loans with a maturity of 2 years or less provided. As revolving loans are usually concluded for short durations, it is highly unlikely that a revolving loan would be found for a maturity of more than two years, and the concrete evidence of the loans verified in the sampled companies supports this conclusion.

(210)

For the remaining loans at group level with a maturity of 2 years and above, based on the available information, the Commission reverted to the general benchmark awarding the highest grade of ‘Non-investment grade’ bonds to the group level, as explained in recitals (166) to (168).

(211)

Furthermore, the Commission concluded that at the level of the companies involved in the production of HRF, the situation was such that that these companies would not have had access to further loans during the IP absent State support. Therefore, the received benefit for these companies went beyond an ordinary mark-up of an interest rate. Rather, the benefit during the IP derived from the award of loans which would not have been granted absent State support based on these companies' overall financial situation. In this respect, the Commission noted that the Shougang Group is a large State Owned Enterprise (‘SOE’) which was earmarked as a ‘champion’ in the 11th Five Year Plan and the 12th Five Year Steel Plan.

(212)

Therefore, in line with section E(b)(V) of the 1998 guidelines (31), the Commission decided to treat the outstanding amounts of these loans during the IP as a grant provided in pursuit of governmental policies. Based on the information available, the Commission only countervailed the loans granted during the IP.

(213)

The claims and arguments put forward by the GOC and some sampled companies with regards to the general methodology for the relative spread and the use of a proxy benchmark apply equally to the Shougang Group. The Commission rebutted these points already in recitals (175) to (195).

(214)

Following disclosure, the GOC also objected to the treatment of loans as grants and put forward the following arguments:

(215)

The exporting producers mainly echoed the comments of the GOC. However, some additional specific comments were received from the Shougang Group:

(216)

On the first point, the Commission disagreed with the GOC's statement that it did not disclose the essential facts related to the State support underlying the Commission's findings. The State support mentioned in recital (211) above was part of the overall reasoning on preferential lending and thus referred to the same evidence as the one already described at large in sections 3.4.1 to 3.4.3. In addition, the Commission provided some additional reasoning on the existence of State support to some companies in the steel industry having financial difficulties in section 3.5 below. As both the Shougang Group and the Benxi Group were considered to be national champions, the reasoning described in section 3.5 also applies to them.

(217)

Concerning the second and third points, the Commission clarified that it had not considered the loans provided to the sampled companies to equate to grants as such. Contrary to what was stated by the GOC, the Commission had not changed the legal nature of the financial contribution from loans to grants. Rather, the Commission had acknowledged that the loans provided to the companies had payment obligations attached to it. Only when calculating the benefit of such transaction, the Commission did not make a comparison of interest rates, but took the outstanding capital amount of the loan as a starting point.

(218)

In this respect, the Commission further specified that it did not take the entire amount of the loan into account for the benefit calculations. Only the outstanding part of the loans was taken as a starting point, and several downward adjustments were subsequently made on this amount. First, the benefit was determined based on the outstanding capital amount of the loan minus the interest paid during the IP. Second, the capital amount of the loan was adjusted by depreciating it according to the underlying purpose of the loan. If the purpose of the loan was labelled as liquidity/working capital, the full amount was taken. If the loan was clearly linked to a long-term investment, the capital amount was depreciated over the duration of the loan, and only the amount allocated to the IP was taken into consideration. Finally, the amount of the benefit was further adjusted to reflect only the number of days in the IP the loan was running.

(219)

All these adjustments show that the Commission did not take into account the full amount of the loan for the benefit calculation. Therefore, the Commission found that the reasoning as applied in the Panel Report in EC — DRAMS was not applicable to this investigation. That case, dealt with a question of calculation methodology (34), and the Panel mainly took issue with the fact that the EC had taken the full amount of Hynix's loans as a benefit, without taking into consideration the obligations attached to it (35). As this was not the case in the current investigation, this claim was therefore rejected.

(220)

With respect to the GOC's claim that the financial situation of the Shougang and Benxi Groups corresponded to a ‘BB’ rating, which should be sufficient to obtain loans on the market, the Commission recalled that it made a differentiated assessment of the companies at the group level and the companies at the level of the production companies. The Commission's conclusion was that the financial situation corresponding to a BB rating was only applicable at the level of the group, but not at the level of the companies involved in production activities. It thus rejected this claim.

(221)

With respect to the GOC's observation that the EU producers were also making losses, but were still able to refinance their debts, the Commission noted that, contrary to the situation in the PRC, the refinancing of debts of the EU industry took place at the level of the overall group, not at the level of the production companies. The financial situation of the EU industry at the level of the group was not the same as at the level of the individual production companies. In particular, the consolidated financial statements of the Arcelor Mittal, Thyssen Krupp and Tata Groups all showed profits during the IP. In addition, as described in recital (192) above, the terms and conditions of the refinancing operations in the EU and in the PRC were very different. Therefore, this observation was ill-founded.

(222)

As for the Shougang Group more specifically, the fact that the Group as whole has been profitable did not put in question the Commission's calculation methodology on reported loans. As explained in (156), companies in the group have been assessed separately and conclusions and treatment adapted according to their individual situation. This approach was confirmed during the verification visit where parties stated that in its assessment of the guarantor, the specific company's situation is considered and not the situation at group level. As for the guarantees, except for Qian'an Coal, no information was provided in the questionnaire replies on the guarantors of the reported loans. Therefore, this claim was rejected.

(223)

Concerning the financial situation of the Jingtang production company, this company has been continuously loss-making since the start of its commercial operations in 2010, except for the years 2014 and 2015, when it barely managed to break even with profits in a range of 0 % to 0,5 %. In addition, since its creation, this company has recorded accumulated losses of [13-16] billion RMB. The company has continuously performed far below the expectations raised in the feasibility report on which the approval of the Jingtang construction project was based. During the IP, an asset evaluation report was drawn up in relation to a change in the shareholding structure of Shougang Jingtang. This report evaluated the net value of the company during the IP at less than a third of the initial investment amount. The Commission therefore maintained its conclusions with respect to the Jingtang production company.

(224)

With respect to Shougang Group's questioning of the Commission's calculation methodology, the Commission clarified that it did notice that in all Chinese companies the operating profit reported in the financial statements actually was the profit after payment of the financial expenses. Therefore, when calculating its financial indicators, the Commission had added the financial expenses back to the operating profit in order to know the earnings before interest expenses of each company. Therefore, the Commissions maintained its position on the calculation of the financial indicators.

(225)

Upon disclosure, the Shougang Group also criticised the lack of detail with respect of the Commission's treatment of three of its producing companies. The Commission observed that it provided full detail in its second specific disclosure. In particular, the Commission made an assessment of the financial situation of Qian'an Coal, Shougang Mining, and Xishan Coking over the period 2012-2015. Next to the profitability, other financial ratios were considered in order to draw conclusions on the financial soundness of the companies, as described in recitals (226) to (228) below.

(226)

In the case of Qian'an Coal, the company had recorded marginal profits (close to the break-even point) before 2014, a small profit in 2014 (less than 3 %), and was loss-making during the IP. Its turnover had been continuously decreasing and nearly reduced by half between 2012 and 2015. Moreover, the company had a continuously high leverage (debt/asset ratio over 60 %) in that time span, and did not generate enough operating profit to cover the payment of its interest expenses during the IP (interest coverage ratio < 1). About one third of the short-term loans of the company granted during the IP (and representing around one third of the total outstanding debt of the company) are considered to be revolving loans.

(227)

Shougang Mining had been continuously loss-making over the period 2012 to 2015, except in 2013, when it generated a small profit margin. In total, the company had recorded accumulated losses of around 2 billion RMB in 2015. The turnover of the company had been continuously decreasing over the past 4 years, and reduced by more than half between 2012 and the IP. Shougang Mining had a continuously high leverage (debt/asset ratio around 80 %) over the past 5 years, and did not generate enough operating profit to cover the payment of its interest expenses in any of the past 5 years (interest coverage ratio < 1). The only loan granted to the company during the IP was considered to be a revolving loan. The Commission therefore maintained its conclusions with respect to Qian'an Coal and the Shougang Mining companies.

(228)

Xishan Coking was created at the end of 2009, and started with a large loss (exceeding 300 million RMB), which had still not been absorbed during the IP. The turnover of the company had been decreasing over the past 4 years and the company was increasingly leveraged over that time span. Many loans granted to the company during the IP were considered to be revolving loans. However, the Commission accepted the claim by the Shougang Group that a high proportion of the debts of the Xishan Coking could actually be attributed to Jingtang and that the financial results of Xishan Coking were highly affected by this fact. In addition, the company had continuously recorded profits between 2012 and 2015. As a result, the 2015 loans by Xishan Coking were not treated as grants, and the benefit received was recalculated under the same methodology as for the companies at the level of the group, as described in recitals (209) to (210) above.

(229)

The Benxi Group presented itself in a generally difficult financial situation according to its own financial accounts. It was loss-making in 2015, it was highly leveraged and it continuously increased its liabilities over the period 2012-2015. Furthermore, revolving loans were found on-spot during the verification at the level of the parent company.

(230)

At the level of the company involved in the production of HRF, the financial statements as well as evidence found relating to specific loans showed that this company was operating as an ongoing concern despite consecutive years of losses or marginal profits, continuously increasing debt to assets ratios, worsening financial indicators and an uncertain outlook for the future. The company did not generate enough operating profit to cover the payment of its interest expenses during the entire period 2012-2015. Furthermore, the Commission also found one revolving loan among the sampled loans, and in the loan tables, some short term loans were replaced with new loans for the same amount at expiry.

(231)

Despite these circumstances, the Benxi Group was awarded a AA+ domestic credit rating during the IP by a Chinese subsidiary of Moody's. However, the general disclaimer of this subsidiary highlights that it only provides domestic ratings reflecting relative credit risk within China, whereas Moody's role is to provide management expertise, technological support and analyst training. Therefore, in light of the overall distortions of Chinese credit ratings mentioned in recitals (159) to (161) above, as well as the evidence found during the verification, the Commission disregarded the Chinese rating of the Benxi Group.

(232)

In view of the above general situation, the Commission found it necessary to find an appropriate benchmark at the level of the group. In order to take into account the increased risk highlighted by the existence of revolving loans, and given that the conditions and the maturity of these loans were essentially comparable to the high interest loan mentioned in recital (162) above, the Commission used the same benchmark as set out in that recital for all loans with a maturity of 2 years or less provided. As revolving loans are usually concluded for short durations, it is highly unlikely that a revolving loan would be found for a maturity of more than two years, and the concrete evidence of the loans verified in the sampled companies supports this conclusion.

(233)

For the remaining loans at group level with a maturity of 2 years and above, based on the available information, the Commission reverted to the general benchmark awarding the highest grade of ‘Non-investment grade’ bonds to the group level, as explained in recitals (166) to (168).

(234)

Furthermore, the Commission concluded that at the level of the production company, the situation was such that that this company would not have had access to further loans during the IP absent State support. Therefore, the received benefit for these companies went beyond an ordinary mark-up of an interest rate. Rather, the benefit during the IP derived from the award of loans which would probably not have been granted absent the State support based on the company's overall financial situation. In this respect, the Commission noted that the Benxi Group is a large SOE which was earmarked as a ‘champion’ in the 12th 5 Year Steel Plan.

(235)

Therefore, as illustrated in section E(b)(V) of the 1998 guidelines, the Commission decided to treat the outstanding amounts of these loans during the IP as a grant provided in pursuit of governmental policies. Based on the information available, the Commission only countervailed the loans granted during the IP. The benefit conferred was determined based on the outstanding capital amount of the loan minus the interest paid during the IP. The capital amount of the loan was adjusted by depreciating it according to the underlying purpose of the loan. If the purpose of the loan was labelled as liquidity/working capital, the full amount was taken. If the loan was clearly linked to a long-term investment, the capital amount was depreciated over the duration of the loan, and only the amount allocated to the IP was taken into consideration. Finally, the amount of the benefit was further adjusted to reflect only the number of days in the IP the loan was running.

(236)

The claims and arguments put forward by the GOC and some sampled companies with regards to the general methodology for the relative spread and the use of a proxy benchmark applies equally to the Benxi Group. The Commission's position on these claims, as described above in recitals (175) to (195) applies equally to the Benxi Group.

(237)

Furthermore, the claims and arguments put forward by the GOC and some sampled companies with regards to the general methodology for the loans treated as grants applies equally to the Benxi Group. The Commission's position on these claims, as described above in recitals (216) to (221) applies equally to the Benxi Group.

(238)

Following disclosure, the Benxi Group mainly echoed the comments of the GOC. However, it also added some additional specific comments:

(239)

On the first point, the Commission noted that the company recognized in its reply to the disclosure document that it had been faced with financial difficulties in the recent years, and that it did not dispute any of the findings made by the Commission, such as declining profit margins and turnover, high debt ratio, and inability to pay the interests on loans. The company also had significant losses during the IP. Furthermore, the Benxi Group recognized that some loans were not repaid in line with the original repayment schedule, thus showing that the company experienced difficulties in its ability to repay loans. In view of this overall situation of the company, the Commission maintained its position that under normal market conditions, the company would not have had access to further loans.

(240)

Concerning the fact that the concerned companies formed part of a large group of companies, and that their loans were guaranteed by the parent companies, the Commission recognized that the loans provided to the production company in the Benxi Group were indeed guaranteed by another company in the group. However, it became clear during the verification visit that these guarantees were provided by other several other companies in the group which were in a similar difficult financial situation. In fact, all of the verified companies in the Benxi Group were loss-making during the IP, and the company itself stated in its questionnaire reply that the group was in a situation of ‘sustained loss’ affecting several affiliated companies, with no prospects of coming back to profits in the near future.

(241)

With respect to the credit rating of the company, the Commission considered that the confirmation of the difficult financial situation by the company itself clearly showed that it should not have gotten an AA+ rating. The only new evidence provided by the company in this respect was that there was not necessarily a link between its financial difficulties and its credit rating, as it was a large iron and steel group with a long history and a good credit reputation. The Commission considered that this kind of argumentation adequately reflected the Commission's claim that credit ratings in China were not reliable, as they were mainly based on the size and the status of companies, and not on their actual credit situation.

(242)

Concerning the third point, the Commission disagreed with the company's claim that the subsidy related to loans treated in a similar way as grants was not included in the complaint. Indeed, this concerned a separate calculation methodology within the preferential lending, which was indeed included in the complaint. This claim was therefore rejected.

(243)

The investigation showed that all sampled groups of exporting producers benefited from preferential lending during the IP. In view of the existence of a financial contribution, a benefit to the exporting producers and specificity, this benefit should be considered as a countervailable subsidy.

(244)

The subsidy rate established with regard to this scheme during the IP for the sampled groups of companies amounts to:

(245)

The complainant alleged the existence of a separate subsidy programme which entails a potential direct transfer of funds by the GOC trough a de facto guarantee that ensures the continuity of operations for companies in the hot-rolled flat industry that, due to their financial situation, face difficulties to repay loans.

(246)

The Commission noted that the evidentiary threshold for proving unwritten measures under the WTO is particularly demanding in terms of the evidence required to show their existence. In particular, the investigation authority must clearly establish, through arguments and supporting evidence, at least that the alleged unwritten ‘rule or norm’ is attributable to foreign government; its precise content; and that it does have general and prospective application. This high threshold is only met if sufficient evidence is put forward with respect to each of these elements (36).

(247)

The Commission first verified whether the alleged de facto guarantee could be attributed to the GOC. In that respect, it confirmed that there is a governmental policy in the PRC to develop large national champions (mostly state-owned) in the steel industry over smaller (mostly private) mills.

(248)

This policy was already in place in 2009, when the ‘Blueprint for the Steel Industry Adjustment and Revitalisation’ was issued by the State Council. This document stated that as a basic principle, the key backbone enterprises and key categories in the iron and steel industry should be supported to keep a stable market and to promote a stable development of the industry.

(249)

In order to counter the crisis of 2008, the Blueprint document further emphasized that the layout of the industry should be adjusted and optimized based on ‘the control of total quantity in combination with the elimination of backward capacity, enterprise restructuring and relocation of urban steel’.

(250)

According to the document, the objective of the GOC is to establish several super-large enterprises with strong independent innovation capability and international competitiveness, and to make the capacity of the top five domestic iron and steel enterprises account for over 45 % of the national output. Therefore, several super-large iron and steel enterprises are expected to be built with a capacity of over 50 000 000 tonnes and strong international competitiveness such as Baosteel, Ansteel and Wuhan Iron and Steel. In addition, several large iron and steel enterprises with a capacity of 10 000 000-30 000 000 tons are expected to be formed. Furthermore, the document mentions the completion of the relocation of Shougang Group and the construction of its Caofeidian Iron and Steel Base as an objective.

(251)

The Blueprint policy document envisaged and promoted financial support for these key backbone enterprises, and also foresees support in terms of share issuance, corporate bonds, medium term notes, short-term financing bill, bank loan and absorption of private equity investment for those projects consistent with environmental protection and land laws and rules and investment management regulations, and enterprises with merger & acquisition or restructuring activities.

(252)

On the other hand, however, the document mentioned financing limitations for the projects with illegal construction and unauthorized approval and enterprises with ‘backward capacity’. It specifically stated that ‘in case of random extension and renovation or transfer of backward facilities to other places, the financial institutions will not provide the credit loan support in any forms, and the national land and resources department will not handle the land use procedures’.

(253)

The 12th Five Year Steel Plan continued the same strategy as set out in the Blueprint. The 12th Five Year Plan also referred to key steel enterprises, and optimization of the layout of the industry is considered to be a main target. It specified that big projects are encouraged while small projects should be curbed, and it combined this with the elimination of backward production capacities.

(254)

One of the main objectives of the 12th Five Year Plan was also to reach a certain industrial clustering level by significantly reducing the quantity of the steel enterprises. The target was to increase the proportion of the steel production of the top-10 steel enterprises to 60 % of the national aggregate. This target had to be achieved through the promotion of mergers, restructuring, and elimination of backward capacities. The Plan furthermore contained a list defining which products and production processes are considered to be backward.

(255)

All of the sampled companies in this investigation were mentioned as key large-scale enterprises in the 12th Five Year Steel Plan.

(256)

Finally, the 13th Five Year Steel Plan mentions in chapter I.2 that ‘Some Chinese steel enterprises are good and some others are not.’ One of the key objectives is again to increase the industrial concentration degree (of the first 10 enterprises) to 60 % in 2020 (since the target was not reached during the 12th Five Year Steel Plan). This fits within the overall objective to reduce overcapacities, and is again accompanied by a determination to foster mergers and restructuring

(257)

Chapter IV of the 13th Five Year Steel Plan also emphasizes the necessary withdrawal of zombie enterprises from the market. These enterprises are defined as enterprises with successive years of losses, with insufficient assets to reduce debt, with losses and no perspectives, and relying on banks' continuous loans and other methods. According to the Plan, enterprises with insufficient assets to reduce debt or defaulting on their debt should proceed to bankruptcy and reorganization.

(258)

In addition, the specific guidelines relating to financial support and the reduction of overcapacity which were discussed in section 3.4.1.1 above, make a distinction between the ‘good’ companies, i.e. large industrial groups that follow the national industrial policies, and the ‘bad’ companies, i.e. smaller companies with ‘backward production capacity’, that do not fit into governmentally encouraged categories.

(259)

Since all the above-mentioned documents (the 2009 Blueprint, the 12th and 13th Five Year Plan and the respective Steel plans) emanate from the State Council, the policies therein can therefore be attributed to the GOC.

(260)

The Commission then analysed the precise content of the alleged de facto-guarantee. It did not find that there was an overall encompassing unwritten measure to bail-out all steel companies in China. Rather, all the documents presented in the previous section make a distinction between ‘good’ companies, i.e. large industrial groups that follow the national industrial policies, and ‘bad’ companies, i.e. smaller companies with ‘backward production capacity’, that do not fit into governmentally encouraged categories. Accordingly, even assuming its very existence, an unwritten de-facto guarantee would only apply to the national champions that fall within the first category.

(261)

The Commission then tried to ascertain whether such an unwritten guarantee was of general and prospective application.

(262)

The impact of this governmental policy was recently described in a Research Report of the National Academy of Development and Strategy of the Renmin University of China (37) on zombie companies in China. According to this report, 51 % of the listed Chinese steel companies in 2013 could be defined as zombie enterprises. Seen from the angle of ownership, the proportion of zombie enterprises was the highest in state-owned and collectively-owned enterprises. From the perspective of age and scale, old large and medium-sized enterprises have the highest proportion of zombie enterprises. The report also analysed the causes for the existence of such a large number of zombie enterprises in certain sectors, and found that local governments continuously support zombie enterprises on the verge of bankruptcy and maintain the picture through subsidies and loans. Therefore, if a company receives more subsidies or is a state-owned enterprise, the chance for it to become a zombie is higher.

(263)

Furthermore, if an industry, such as the steel industry, is listed by the government in the key support scope, local governments will rush to support this industry, thus leading to overcapacity and the creation of additional zombie companies. Then the government tried to reduce the number of companies by encouraging mergers and acquisitions by larger enterprises. The report confirms that local governments made stipulations that only allow a certain number of big enterprises to be saved during industry aid. Finally, the report highlights that credit discrimination by financial institutions also influences the creation of zombie enterprises. Indeed, after 2008, the profit ratio of SOEs saw a decrease, whereas their debt ratio increased every year. On the contrary, the debt ratio of private enterprises decreased although their profit ratio remained stable. This indicates that it was easier for the SOEs than for the private enterprises to get loans.

(264)

In summary, the aim of this policy is thus to financially support the ‘good’ companies, i.e. the key enterprises or national champions, through all sorts of measures, whereas the bad ones shall disappear by not awarding them any loans at all. Furthermore, the champions are encouraged to eliminate their smaller competitors through mergers and acquisitions supported by the government. The economic benefit of this policy may go as far as constituting an implicit de-factor guarantee for some State owned large enterprises in financial difficulties.

(265)

However, the Commission was unable to identify any more precise criteria for the general and prospective application of such an unwritten measure as a separate scheme. It rather concluded that having treated preferential loans given to specific large SOEs in financial difficulties as grants rather than loans, that there was no need to further investigate into this issue.

(266)

Upon disclosure, the complainant took issue with this conclusion and argued that the ‘wider measure is the state plan to subsidise steel production’ that is ‘implemented through both written norms such as law and rules as well as orders, administrative guidelines or recommendations’. In support of its view that the evidentiary requirements were met, the complainant cited inter alia the ruling of the WTO Appellate Body in the US-Zeroing case, where the evidence consisted of considerably more than a string of cases, or repeat action (38). The Commission did not agree with this analysis. In the US-Zeroing case, the continuous practice of the US Department of Commerce to apply a certain unfair calculation methodology in anti-dumping cases was at issue. This was a very specific course of action, based on an internal preference of one government authority which is specifically entrusted by the federal government to conduct trade defence cases. It cannot be compared to the construction of ‘wider measure’ which would encompass the prospective action of potentially thousands of government actors at local, regional or central level, implementing one single plan. The Commission thus rejected this claim.

(267)

As mentioned in section 3.2 above, the Commission informed the GOC that, given the absence of questionnaire replies from producers of iron ore, coke and coking coal, it might have to base its findings on best facts available pursuant to Article 28(1) of the basic Regulation as far as the information relating to suppliers of iron ore, coke and coking coal was concerned. The Commission investigated whether the sampled companies received raw materials for producing HRF at subsidised prices from the Government.

(268)

All sampled companies purchased iron ore domestically from either related or unrelated companies but also imported iron ore in significant volumes. The Commission established, based on verified information concerning individual iron ore transactions from all sampled companies that the purchase prices for iron ore were similar irrespectively of whether the iron ore was procured domestically or imported or procured from related or unrelated companies.

(269)

Two sampled companies had related overseas mines. However, the investigation did not reveal any indications of State support connected to the investment in those mines. In any case, the purchase (transfer) price from the related mines appeared to have been set at arm's length.

(270)

The complainant also alleged that the GOC used the China Iron & Steel Association (‘CISA’) to influence the international purchase price negotiations. The Commission found evidence that pointed to such practice in the past. However, this practice was abandoned in 2013 and there is no indication that the practice conferred any benefits to the sampled HRF producers during the investigation period.

(271)

Based on the above findings the Commission did not establish that the Government provided a subsidy to the sampled companies for the purchase of iron ore during the investigation period.

(272)

All sampled companies purchased coke domestically from either related or unrelated companies but also imported small quantities of coke. The Commission established, based on verified information concerning individual transactions from all sampled companies that the purchase prices for coke were similar irrespectively of whether the coke was procured domestically or imported or procured from related or unrelated companies.

(273)

Based on verified information from the sampled companies the Commission could not establish that the GOC had provided a subsidy to them for the purchase of coke during the investigation period.

(274)

The GOC explained that the overall coal export market is regulated under State-trading enterprise rules, which have been notified to the WTO (39). Export volumes are restricted through export quota, and exporters need to apply for an export license. This export license has only been granted to five companies, namely China National Coal Group Corporation, China Minmetals Corporation, Shanxi Coal Import and Export Group Co. Limited, Shenhua Group Corporation Ltd. and Aluminum Corporation of China Limited. All of them are large SOEs. In addition, an export duty of 3 % is in place. According to the information received from the GOC, both exports and imports represent less than 1 % of domestic consumption, respectively.

(275)

GOC officials also confirmed during the verification visit that the GOC sets the number of production days per year for the coking coal companies, which is a strong indication that the supply of domestic coking coal is influenced by State intervention. No further information was provided by the GOC on the functioning of the coking coal market.

(276)

All sampled companies purchased coking coal domestically from either related or unrelated companies, but also imported small quantities of coking coal. The Commission established, based on verified information concerning individual transactions from all sampled companies that the purchase prices for coking coal were similar irrespectively of whether the coking coal was procured domestically or imported and irrespectively of whether the coking coal was procured from related or unrelated companies.

(277)

Although the investigation found that the supply of coking coal on the domestic market is to a certain extent influenced by the State for the reasons explained in recitals (274) and (275) above, the Commission could not establish that the sampled companies received any subsidies for related to the supply of coking coal or that they derived any benefit during the IP from the government interventions.

(278)

Upon disclosure, the complainant alleged that the Commission should also have evaluated the extent to which domestic price on iron ore, coke and coal influences the price that the exporting producers are prepared to pay for imported raw materials. The Commission rejected that argument, as the long-term viability of the costs of production of a producer is not required to make a determination of a benefit. Rather, the Commission had to assess — and did assess — whether the government had provided iron ore, coke or coal for less than adequate remuneration. That was not the case as the producers had received their raw materials at market price.

(279)

All sampled companies either generated power themselves or purchased it from the grid. The purchase prices of power from the grid followed the officially established price levels set at provincial level for large industrial clients. As found in previous investigations (40), this level did not confer a specific advantage for these large industrial clients. Moreover, in this case, the Commission found no evidence that any of the companies benefitted from a lower preferential rate. The Commission also did not find any specific electricity-related subsidies in the sampled companies.

(280)

Based on verified information from the sampled companies the Commission could thus not establish that the GOC had provided a subsidy to them for the purchase of energy during the investigation period.

(281)

All land in the PRC is either owned by the State or by a collective, constituted of either villages or townships, before the land's legal or equitable title may be patented or granted to corporate or individual owners. All parcels of land in urbanized areas are owned by the State and all parcels of land in rural areas are owned by the villages or townships therein.

(282)

Pursuant to the constitutional law of the PRC and the Land Law, companies and individuals may however purchase ‘land use rights’. For industrial land, the leasehold is normally 50 years, renewable for a further 50 years.

(283)

According to the GOC, since 31 August 2006, by Article 5 of the State Council's Notice regarding Strengthening Regulation of Land (GF[2006] No.31), title to industrial land can only be granted from the State to industrial enterprises through bidding or a similar public offering process whereby the final deal price must not be lower than the minimal bidding price. The GOC considers that there is a free market for land in the PRC, and that the price paid by an industrial enterprise for the leasehold title of the land reflects the market price.

(284)

The land-use right provision in China falls under Land Administration Law of the People's Republic of China. In addition, the following documents also are part of the legal basis:

(285)

According to Article 10 of the ‘Provision on Assignment of State-owned Construction Land Use Right through Bid Invitation, Auction and Quotation’, local Authorities set land prices according to the urban land evaluation system, which is only updated every three years, and the government's industrial policy.

(286)

In previous investigations, the Commission found that prices paid for LUR in the PRC are not representative of a market price determined by free market supply and demand, since the bidding or public offering process was found to be unclear, non-transparent and not functioning in practice, and prices were found to be arbitrarily set by the authorities. As mentioned in the previous recital, the authorities set the prices according to the Urban Land Evaluation System which instructs them among other criteria to consider also industrial policy when setting the price of industrial land. Also, at least in the steel sector, the access to industrial land is by law limited only to companies respecting the industrial policies set by the State (41).

(287)

The current investigation did not show any noticeable changes in this respect. For instance, the Commission found that none of the sampled exporting producers had gone through bidding or a similar public offering process for any of its land use rights, not even for the land use rights obtained recently. Land use rights held by the sampled companies from before the year 2000 were usually allocated to the company free of charge. More recent plots of land have been allocated by local authorities at negotiated prices.

(288)

The Commission also found that companies in the Shougang Group received refunds from local authorities to compensate for the prices which they paid for the LURs, for example for works done by the company itself as regards basic infrastructure on the land. Furthermore, some of the land use rights obtained by companies in the Shougang Group only had to be paid several years after the land had been put into use.

(289)

The above evidence contradicts the claims of the GOC that the prices paid for LUR in the PRC are representative of a market price which is determined by free market supply and demand.

(290)

Following disclosure, the GOC claimed that there is also a dynamic land monitoring system in addition to the urban land monitoring system, and that this was acknowledged in the Commission's expiry review on Solar Panels originating in the People's Republic of China. The Commission acknowledged that the dynamic land monitoring system was indeed analysed in the Solar Panels expiry review regulation. (42) In recitals 421 and 425 thereof, the Commission had found that these prices are higher than the minimum benchmark prices set by the urban land evaluation system and used by local governments, because the latter are updated only every three years, while the dynamic monitoring prices are updated quarterly. However, there was no indication of land prices being based on the dynamic monitoring prices. In fact, the GOC had confirmed during the investigation on solar panels that the urban land price dynamic monitoring system monitors the fluctuations of the price levels of land in certain areas (i.e. 105 cities) in the PRC and is designed to assess the evolution of land prices. However, the starting prices in biddings and auctions were based on the benchmarks established by the land evaluation system. In addition, in this case, the sampled groups of companies received their plots of land for free or through allocation. Therefore, the fact that the latter system existed is irrelevant since it did not apply to the sampled companies.

(291)

The GOC also claimed that the fact that land had been allocated at negotiated prices did not reflect the absence of fair competition or the fact that companies paid prices below the normal market rate. However, neither the GOC nor the sampled companies provided any new evidence that the prices paid for allocated land were based on market prices.

(292)

Furthermore, the GOC claimed that the Commission referred to findings of previous investigations to establish whether market prices are distorted as a result of government intervention, instead of using the particular facts underlying the case. The Commission notes that it did use the particular facts of the case, as described in recitals (287) to (288) above, which supported the Commission's conclusion that the findings of previous investigations were still valid.

(293)

The Benxi Group also claimed that the Commission should accept the land price in mainland China, as the company considered that it had paid a reasonable price reflecting the real value of the land. However, the company did not provide any new evidence which would change the Commission's assessment. The claim was therefore rejected.

(294)

The GOC also argued that refunds concerning works done by the company for basic infrastructure did not constitute subsidies as this is normally a task for the local government. However, Article 3 (1) (iii) of the basic Regulation only exempts general infrastructure from the notion of a subsidy. Infrastructure services dedicated to the exclusive use of a company or its clients, such as private roads or other utilities, filling holes, other works in order to render the land slot ready for building a factory is not a general infrastructure to be provided by the State. Rather, it is a company dedicated infrastructure which would not have been built unless the company were to be established in a particular land slot. The Commission therefore rejected this claim.

(295)

The situation concerning land provision and acquisition in the PRC is non-transparent and the prices are arbitrarily set by the authorities.

(296)

Accordingly, the provision of land-use rights by the GOC should be considered a subsidy within the meaning of Article 3(1)(a)(iii) and Article 3(2) of the basic Regulation in the form of provision of goods which confers a benefit upon the recipient companies. As explained in recitals (285) to (289) above, there is no functioning market for land in the PRC and the use of an external benchmark (see recitals (300) to (311) below) demonstrates that the amount paid for land-use rights by the sampled exporting producers is well below the normal market rate.

(297)

In the context of preferential access to industrial land for companies belonging to certain industries, the Commission notes that the price set by local authorities has to take into account the government's industrial policy, as mentioned above in recital (285). Within this industrial policy, the steel industry is considered to be a pillar of the Chinese industry, and is listed as an encouraged industry. In addition, Decision No. 40 of the State Council requires that public authorities ensure that land is provided to encouraged industries. Article 18 of Decision No. 40 makes clear that industries that are ‘restricted’ will not have access to land use rights. It follows that the subsidy is specific under Article 4(2)(a) and 4(2)(c) of the basic Regulation because the preferential provision of land is limited to companies belonging to certain industries, in this case the steel sector, and government practices in this area are unclear and non- transparent.

(298)

Following disclosure, the GOC argued that the specificity finding of the Commission is moot if there is no functioning market for land in China, since in that case, all companies in China would have the same starting and sales price for the same parcel of LUR. In addition, the GOC considered that the assessment on specificity was not sufficiently reasoned, because it only referred to steel as an encouraged industry.

(299)

The Commission considered that the existence of a non-functioning market in China does not necessarily preclude a specificity finding within this market. Indeed, the fact that the sampled companies received land use rights for free shows that they received a specific preferential treatment. On the other hand, the fact that some companies are receiving an additional preferential treatment is separate from the way in which the market as a whole is functioning. The evidence collected in the sampled companies also confirmed that the ‘encouragement’ referred to in the legal basis was applied in practice. Therefore, the Commission maintained its conclusion that this subsidy is specific and that, consequently, this subsidy is considered countervailable.

(300)

As in previous investigations (43) and in accordance with Article 6(d)(ii) of the basic Regulation, land prices from the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (‘Chinese Taipei’ or ‘Taiwan’) were used as an external benchmark (44). The benefit conferred on the recipients is calculated by taking into consideration the difference between the amount actually paid by each of the sampled exporting producers (i.e., the actual price paid as stated in the contract and, when applicable, the price stated in the contract reduced by the amount of local government refunds/grants) for land use rights and the amount that should normally have been paid on the basis of the Chinese Taipei benchmark.

(301)

The Commission considers Chinese Taipei as a suitable external benchmark for the following reasons:

(302)

Following the methodology applied in previous investigations, the Commission used the average land price per square meter established in Taiwan corrected for inflation and GDP evolution as from the dates of the respective land use right contracts. The information concerning industrial land prices was retrieved from the website of the Industrial Bureau of the Ministry of Economic Affairs of Taiwan. The inflation and GDP evolution for Taiwan were calculated on the basis of inflation rates and evolution of GDP per capita at current prices in USD for Taiwan as published by the IMF for 2015.

(303)

After disclosure, the GOC stated that the Commission should have used a domestic instead of an external benchmark to calculate the amount of the alleged subsidy for the following two reasons: first, if the alleged subsidy is considered to be specific for the steel industry, then the LUR prices of companies from other sector should be used. Alternatively, the prices from the dynamic land monitoring system should have been used. The first point was already addressed above: the fact that some companies are receiving an additional preferential treatment is separate from the way in which the market as a whole is functioning, and the Commission has determined that the market was not functioning as a whole. Concerning the use of the dynamic land monitoring system as a benchmark, the Commission noted that it is designed to monitor the evolution of land prices in certain areas. As such, it is only a reflection of the prices paid for land use rights in China, which are, as stated before, not considered to be market prices.

(304)

The Benxi Group also objected to the use of land prices in Chinese Taipei as a benchmark for the following reasons: Benxi is located in a less-developed area in Liaoning Province, with far less comparable population density, land supplies and GDP than in Chinese Taipei. Furthermore, the Benxi Group has a long history of land use and has invested in land formation and construction for long-term use. Therefore, prices are significantly different. Finally, the company argued that the price of land ownership is not comparable with the price for land use rights.

(305)

First, the Commission disagreed with the company's assessment of Liaoning Province. According to publicly available information (45), Liaoning was one of the first provinces in China to industrialize. Liaoning has the largest provincial economy of Northeast China. Its nominal GDP for 2011 was the 7th largest in China (out of 31 provinces). Although its GDP is lower than the GDP in Taiwan, in 2008, Liaoning was the region with the highest GDP growth among global G8x8, the eight provinces or states below national level with the highest GDP of the top eight GDP nations. Liaoning maintained its GDP growth rate of 13,1 percent in 2009 and held its position as the province with the highest economic growth. Economic growth has since slowed down, with the economy still expanding 3 % in 2015. On a national level, Liaoning is a major producer of pig iron, steel and metal-cutting machine tools, all of whose production rank among the top three in the nation. Liaoning is also one of the most important raw materials production bases in China.

(306)

Second, the fact that some land use rights were acquired in a distant past for long-term use was already taken into account by the Commission when calculating the benefit amount, since the benchmark was adjusted to reflect changes over time by taking into account the evolution of GDP and inflation.

(307)

Third, concerning differences in price between land ownership and land use rights, the Chinese companies do not account for land use rights as a lease, but as an intangible asset, i.e. they treat land use rights in the same way as companies treat purchased land in other countries. The companies themselves do not seem to make any distinction between land ownership and land use rights. Therefore, the claims of the Benxi Group on land use rights were rejected.

(308)

After disclosure, the Shougang Group claimed that the land used by one of its production companies has been reclaimed from the sea. As such, it is temporarily exempted from land use tax as it is considered less valuable. Therefore, a lower benchmark rate should be used for such reclaimed land. The Commission recognized that land reclaimed from the sea is exempted from land use tax during the first years of use. However, the land use tax legislation does not refer to any reduced value of such reclaimed land in connection with the exemption. Furthermore, the Commission already accepted all the adjustments on the land use price requested by the exporting producer, in order to take into account the costs related to the land filling exercise. Finally, the reclaimed land is situated in a prime coastal location close to Beijing, offering easy access for imported raw materials and transport of finished goods. This claim was therefore also rejected.

(309)

The Shougang Group also made additional claims concerning some expenses related to land use rights which had been disregarded for Shougang Qian'an and the incorrect classification of some plots of land for Shougang Mining. The Commission accepted these claim and adjusted the calculation of the benefit amount for these two companies accordingly.

(310)

In accordance with Article 7(3) of the basic Regulation the subsidy amount has been allocated to the IP using the normal life time of the land use right for industrial use land, i.e. 50 years. This amount has then been allocated over the total respective company turnover during the IP, because the subsidy is not contingent upon export performance and was not granted by reference to the quantities manufactured, produced, exported or transported.

(311)

The subsidy rate established with regard to this scheme during the IP for the sampled exporting producers amounts to:

(312)

The ‘two free, three half’ programme entitles FIEs to pay no corporate income tax for the first two years, and to pay only 12,5 % rather than the standard tax rate of 25 % for the next three years.

(313)

The legal basis of this programme is Article 8 of the Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises (the ‘FIE Tax Law’) and Article 72 of the Rules for the Implementation of the Income Tax Law of the People's Republic of China on Enterprises with Foreign Investment and Foreign Enterprises.

(314)

According to the GOC this programme was terminated under Article 57 of the Enterprise Income Tax Law of 2008 (‘EIT Law’) with a transition period until the end of 2012.

(315)

The ‘two free, three half’ scheme conferred benefits on companies during the financial year 2012, after which, according to the government of the PRC, the scheme has been withdrawn. The investigation confirmed that the Jiangsu Shagang Group was eligible for this tax scheme, but did not benefit anymore from the scheme after 2012. The Commission furthermore established that this tax programme had indeed been withdrawn by the GOC.

(316)

No financial contribution or benefit was received by the sampled companies under this programme during the IP.

(317)

This programme allows companies to deduct the income earned from manufacturing through comprehensive use of resources from its taxable income. If a company produces according to the standards specified in the Catalogue of Enterprise Income Tax Preference for Synergistic Utilisation, 10 % of the income is deducted for the calculation of the amount of taxable income of the company concerned.

(318)

The legal bases of this programme are Article 33 of the EIT law, along with the Implementation Rules for the Enterprise Income Tax Law of the PRC; as well as the following notices:

(319)

This tax deduction only applies when a company uses the resources listed in the Catalogue of Enterprise Income Tax Preference for Synergistic Utilisation as the main raw material(s). In addition, the final product resulting from the processing of these raw materials must have been produced in accordance with the relevant national or industrial standards specified in the same catalogue.

(320)

One of the sampled exporting producers, the Hesteel Group, was found to be using this subsidy. This company had applied and received official notification that they had met the criteria of the scheme and would therefore be entitled to complete their corporate tax returns accordingly.

(321)

The Commission considered that the tax deduction 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.

(322)

This subsidy is specific as defined in Article 4(2)(a) of the basic Regulation since it is limited to certain categories of raw materials and final products under specific business categories which are defined exhaustively by law in the Catalogue of Enterprise Income Tax Preference for Synergistic Utilisation.

(323)

Following disclosure, the GOC objected to the specificity established for this subsidy, because it benefited various industries, and was based on objective criteria (i.e. producing with the use of certain resources). The Commission considered that this subsidy is specific given that the legislation itself, pursuant to which the granting authority operates, limited the access to this subsidy only to certain categories of raw materials and final products under specific business categories which are defined exhaustively by law in the Catalogue of Enterprise Income Tax Preference for Synergistic Utilisation, such as those belonging to the steel industry. Examples include raw materials such as converter slag, electric furnace slag, and iron alloy furnace slag used to produce iron and iron alloys, blast furnace gas used to produce electricity and heating power, as well as coke oven gas used to produce ferrous sulfate.

(324)

The Commission therefore considered this subsidy as countervailable.

(325)

The Commission calculated the amount of countervailable subsidy as the difference between the amount of tax normally paid during the IP and the amount of tax actually paid during the IP by the companies concerned.

(326)

The amount of subsidy established for this specific scheme was 0,06 % for the Hesteel Group.

(327)

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.

(328)

More specifically, R&D expenditures incurred to develop new technologies, new products and new crafts which do not form intangible assets and are accounted into the current term profit and loss, are subject to an additional 50 % 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 150 % of the intangible asset costs.

(329)

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:

(330)

During the verification visit at the premises of the GOC, it was 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 well as the current priorities on high technology fields supported by the State, as listed in the Guidance on the Priority Areas for High-Tech Industrialization Priority Development.

(331)

Companies benefiting from this scheme have to file their Income Tax Return and relevant Annexes. The actual amount of the benefit is included in the tax return.

(332)

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. 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 incur R&D expenses in certain high technology priority areas determined by the State, such as the steel sector.

(333)

Following disclosure, the GOC objected to the specificity established for this subsidy, because it benefited various industries, was based on objective criteria (i.e. incurring R&D expenses) and was not countervailed in the Canadian anti-subsidy investigation on certain unitized wall modules from China for lack of specificity. The Commission noted that the scheme had already been countervailed in Coated Fine Paper (46). This subsidy is specific given that the legislation itself, pursuant to which the granting authority operates, limited the access to this subsidy only to certain enterprises and industries classified as ‘priority areas’, such as those belonging to the steel industry.

(334)

The amount of countervailable subsidy was calculated in terms of the benefit conferred on the recipients during the IP. 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 50 % deduction of the actual expenses on R&D.

(335)

Only one company, Hesteel Group, benefitted from this subsidy, and the amount of subsidy was established at 0,28 %

(336)

An organization 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 organizations 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.

(337)

The legal basis for this programme is:

(338)

Two companies, Hesteel Group and Shougang Group, benefited from rebates or exemptions on the payment of land use taxes by the local Land Use Bureau, even though they did not fall under any of the exempted categories as set by the national legislation above.

(339)

The Commission considers that the tax exemption 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. This subsidy is specific within the meaning of Article 4(2)(a) of the basic Regulation as the companies received a tax reduction specifically intended for them, and not available to other companies under the general legal framework mentioned in recital (336).

(340)

Following disclosure, the GOC objected to the specificity established for this subsidy, because it benefited various industries, and was based on objective criteria. The Commission acknowledged that there are objective criteria to determine the recipients of land use tax exemptions. As the companies benefiting from this subsidy received an exemption although they did not fit into any of these objective criteria, the subsidy granted to these companies was de facto specific.

(341)

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

(342)

The Hesteel and the Shougang Group have benefitted from tax exemptions under this scheme. The amount of subsidy relating to this specific scheme for the Shougang Group was 0,66 %. For Hesteel, the amount was insignificant and did not have an impact on the overall subsidy rate of the group.

(343)

The Commission concluded that no financial contribution or benefit was received by the sampled exporting producers from the remaining direct tax exemption programmes mentioned in section 3.3(iv) above during the IP.

(344)

The total subsidy amount established with regard to all direct tax schemes during the IP for the sampled exporting producers was as follows:

(345)

This programme provides an exemption from VAT and import tariffs for imports of capital equipment used in their production. To benefit from the exemption, the equipment must not fall in a list of non-eligible equipment and the claiming enterprise has to obtain a Certificate of State-Encouraged project issued by the Chinese authorities or by the NDRC in accordance with the relevant investment, tax and customs legislation.

(346)

The legal bases of this programme are:

(347)

Equipment imported in order to develop domestic or foreign investment projects in line with the policy of encouraging foreign or domestic investment projects may be exempted from payment of the VAT and/or import duty, unless the equipment category is listed in the catalogue of non-duty exemptible article. To benefit from this scheme, the company needs to obtain a confirmation letter from the local authority responsible for the project, which needs to be submitted to local customs authority.

(348)

The GOC claimed that with effect from 1 January 2009, only the import duty is exempted and VAT on importation of equipment for self-use is collected.

(349)

However, exemptions of both VAT and import duty during the IP were identified for the Shougang Group. These included exemptions for equipment imported in previous years, but for which the benefit was amortized over the lifespan of that equipment and was thus partially allocated to the IP. While the Commission saw no evidence that this exemption was operating during the IP, the Commission established on the basis of the evidence on the file that the Shougang Group still availed benefits under this programme.

(350)

This programme provides a financial contribution in the form of revenue forgone by the GOC within the meaning of Article 3(1)(a)(ii) as FIEs and other eligible domestic enterprises are relieved from payment of VAT and/or tariffs which would be otherwise due. It also confers a benefit on the recipient companies in the sense of Article 3(2) of the basic Regulation.

(351)

The programme is specific within the meaning of Article 4(2)(a) of the basic Regulation. The legislation pursuant to which the granting authority operates limits its access to enterprises that invest under specific business categories defined exhaustively by law and belonging either to the encouraged category or the restricted category B under the Catalogue for the guidance of industries for foreign investment and technology transfer or those which are in line with the Catalogue of key industries, products and technologies the development of which is encouraged by the State. In addition, there are no objective criteria to limit eligibility for this programme and the GOC did not provide conclusive evidence to conclude that eligibility is automatic under Article 4(2)(b) of the basic Regulation.

(352)

Following disclosure, the GOC objected to the specificity established for this subsidy, because it benefited various industries, and was based on objective criteria (i.e. importing certain capital equipment). The Commission considered that this subsidy is specific given that the legislation itself, pursuant to which the granting authority operates, limited the access to this subsidy only to certain categories of imported capital equipment clearly specified exhaustively by law in the catalogue issued by the NDRC for products encouraged by the State, such as those belonging to the steel industry. It also noted that this subsidy was already countervailed in the anti-subsidy investigation on Coated Fine Paper originating in the PRC and in the anti-subsidy investigation on Solar Panels originating in the PRC (47). The fact that eligibility is restricted to specific business categories confirms that the scheme is not generally available to broad economic sectors and therefore benefits under this programme are specific under Article 4(2)(a) of the basic Regulation.

(353)

The amount of countervailable subsidy is calculated in terms of the benefit conferred on the recipients, which is found to exist during the IP. The benefit conferred on the recipients is considered to be the amount of VAT and duties exempted on imported equipment. In order to ensure that the countervailable amount only covered the IP period the benefit received was amortized over the life of the equipment according the company's normal accounting procedures.

(354)

The Shougang Group benefitted from rebates under this scheme. The amount of subsidy established for this specific scheme for the Shougang Group was 0,11 %.

(355)

For environmental reasons, the Shougang Group was asked to relocate its entire steel plant in Beijing to a coastal location in Caofeidian. The project was approved in 2004, construction started in 2006, and production on the new site started end of 2009.

(356)

Notice of the Ministry of Finance and the State Administration of Taxation on Tax Policy Problems related to Shougang Group Relocation (No. 174 [2007] of the Ministry of Finance December 29, 2007).

(357)

The above-mentioned notice provides for an ex-post refund of all value-added taxes and all income tax payments which have been paid by 18 enterprises of the Shougang Group from 2006 to 2009.

(358)

The notice states that ‘the foregoing taxes shall be specifically used for solving Shougang Group's investment in Jingtang Iron & Steel project’. Furthermore, the notice refers to the expenses caused by employee resettlement due to the enterprise relocation.

(359)

However, during the verification at the company, the link with the employee expenses and/or relocation during the period 2006 to 2009 could not be established. In addition, the 18 group companies mentioned in the notice have no link to the Jingtang Iron & Steel project.

(360)

The Commission considered that the tax exemption 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. This programme is specific within the meaning of Article 4(2)(a) of the basic Regulation since the tax exemption was only granted to the Shougang Group. During the verification visit, the GOC confirmed that this was a specific, stand-alone case, and not part of a broader tax programme for companies that are relocating based on the government's policy decisions.

(361)

The benefit conferred on the recipient is the total amount of VAT and income tax exempted. Although the exemption refers to a period preceding the IP, that part of the benefit should be allocated to the IP as the financial contribution was related to a large-scale investment project. In order to ensure that the countervailable amount only covered the IP period the benefit received was amortized over the average life of the company's fixed assets according the company's normal accounting procedures.

(362)

Only the Shougang Group has benefitted from exemptions under this scheme. The amount of subsidy established for this specific scheme for the Shougang Group was 0,90 %

(363)

No financial contribution was received by the sampled exporting producers from the remaining indirect tax exemption programmes mentioned in section 3.3(v) above during the IP.

(364)

The total amount of subsidies established with regard to the indirect tax exemption and import tariff rebates schemes during the IP for the sampled exporting producers was 1,01 % for the Shougang Group.

(365)

All of the sampled companies benefited from a variety of grants related to environmental protection and reduction of emissions, such as e.g. incentives for Environmental Protection and Resource Conservation, Promotion of synergistic resource utilization, Incentive funds for energy conservation retrofit projects, Promotion of Energy Management Demonstration Centres, grants related to Air Pollution Improvement Projects, grants related to Flue Sintering Desulfuration Projects, incentives for circular economy projects.

(366)

The legal bases of this programme are:

(367)

The energy saving and conservation programme confers 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 in the form of grants to the producers of the product concerned.

(368)

The Commission also found that this subsidy programme is specific within the meaning of Article 4(2)(a) of the basic Regulation since only companies operating in key technologies or in the production of key products as listed in the guidelines and catalogues that are published on a regular basis are eligible to receive them. In particular, the State Council opinion of 2010 applies only to the steel industry. Moreover, the MIIT document of 2015 specifically mentions steel as an industry for specific incentives related to energy conservation.

(369)

Following disclosure, the GOC objected to the specificity established for this subsidy, because it benefited various industries. The Commission considered that this subsidy is specific given that the legislation itself, pursuant to which the granting authority operates, limited the access to this scheme only to certain categories of companies which are defined exhaustively by law. The previous recital gives specific examples of legislative documents which apply only to the steel industry or specifically mention the steel industry (the other industries mentioned were non-ferrous metals, building materials, chemicals and textiles). The fact that certain other limited industries were mentioned does not contradict its findings on specificity.

(370)

The benefit was calculated as the amount received in the IP or allocated to the IP, where the amount was depreciated over the useful life of the fixed asset to which the grant was related. The Commission considered whether to apply an additional annual commercial interest rate in accordance with section F.a) of the Commission's 1998 Guidelines for the calculation of the amount of subsidy (48). 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 IP according to the depreciation rates of the related fixed assets, in line with the calculation methodology used in previous cases (49).

(371)

As mentioned in section 3.2.2 above, best facts available were used to determine the amount of subsidies with regard to grants for the Jiangsu Shagang Group. The Commission used as best facts available the highest subsidy amount for each type of grants found. The amount of subsidy established with regard to energy saving and conservation grants during the IP for the sampled exporting producers was therefore as follows:

(372)

The sampled companies benefited from a variety of grants under this programme related to R&D, technological upgrading and innovation, such as e.g. promotion of R&D tasks under the Science and Technology Support Plans, projects under the 863 Plan, Promotion of Key Industry Adjustment, Revitalisation and Technology Renovation, grants for the Commercial Application of R&D Results, Promotion of Quality Improvement.

(373)

The legal bases of this programme are:

(374)

The grants provided under this programme confers 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 in the form of grants to the producers of the product concerned.

(375)

The Commission also determined that these subsidies are specific within the meaning of Article 4(2)(a) of the basic Regulation because only companies operating in key technologies as listed in the guidelines and catalogues that are published on a regular basis are eligible to receive them. The steel sector is listed among the eligible sectors.

(376)

Following disclosure, the GOC objected to the specificity established for this subsidy, because it benefited various industries. The Commission considered that this subsidy is specific given that the legislation itself, pursuant to which the granting authority operates, limited the access to this scheme only to the steel industry (cfr. the Revitalisation Plan mentioned in the legal basis) or specifically mentioned the steel industry (such as the Medium to Long-Term Programme on Technological and Scientific Development and the 863 Plan). The fact that other industries were mentioned does not contradict its findings on specificity.

(377)

The benefit was calculated in accordance with the methodology described in recital (370) above.

(378)

The amount of subsidy established with regard to this type of subsidies during the IP for the sampled exporting producers was as follows:

(379)

The complaint provided evidence which showed that the steel industry in the PRC may receive various one-off or recurring grants from different levels of government authorities, i.e. local, regional and national.

(380)

The investigation revealed that all sampled groups of companies also received significant one-off or recurring grants from various government levels resulting in the receipt of benefits during the IP. Some of these had already been reported by the sampled companies in their respective questionnaire replies, while others were found on-the-spot during the verification visits. None of them were disclosed in the questionnaire reply of the GOC.

(381)

These grants were given 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 location or type of industry. The level of legal detail for the exact law under which these benefits were granted, if there was any legal basis for them at all, was not disclosed. However, the Commission was sometimes provided with a copy of a document issued by a government authority which accompanied the grant of funds (referred to as ‘the notice’) during the verification visit.

(382)

Given the large amount of different grants contained in the complaint and/or found in the books of the sampled 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 were initially supplied by the four sampled companies.

(383)

Examples of such grants were patent funds, science and technology funds and awards, business development funds, grants for basic infrastructure, support funds provided at district or provincial level, funds for the import of iron ore, funds for the company's relocation, overseas advanced technology introduction special fund, interest discounts on loans for imported equipment.

(384)

These 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 producers of the product concerned took place and a benefit was thereby conferred.

(385)

These grants are also specific within the meaning of Articles 4(2)(a) and 4(3) of the basic Regulation given that they appear to be limited to certain companies or specific projects in specific regions and/or the steel industry. 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.

(386)

In all cases the companies provided information as to the amount of the grant, and from whom the grant was received. The companies concerned also mostly booked this income under the heading ‘subsidy income’ in their accounts and had had these accounts independently audited. This has been taken as positive evidence of a subsidy that conferred a countervailable benefit.

(387)

Therefore, the Commission decided that the verified findings during on-the-spot verifications represented a reasonable indicator of the level of subsidisation in this respect. As those grants share common features, they are awarded by a public authority and are not part of a wider subsidy programme, but individual grants, the Commission assessed them together.

(388)

In its reply to the disclosure the GOC claimed that not enough detail was provided by the Commission in order to justify the specificity of these grants. It should be pointed out, however, that very little detail was supplied to the Commission relating to these grants in questionnaire replies. The sampled exporting producers did not challenge the amounts calculated by the Commission, which were disclosed to them. They also did not challenge the fact that these grants were received from the GOC. The findings of the verifications were very different to the number and total value of grants reported in the questionnaire responses of the GOC. The Commission decided that the on-the-spot findings represented a reasonable indicator of the level of subsidisation in this respect.

(389)

The fact that the Commission stated that the grants ‘appear’ to be limited exactly refers to this lack of transparency concerning the existence of objective eligibility criteria for the sampled companies. The Commission did not accept that this approach demonstrates any failing to justify the specificity of the countervailed grants. The claim that the Commission did not meet the required standard for specificity was therefore rejected.

(390)

The benefit was calculated in accordance with the methodology described in recital (370) above.

(391)

The amount of subsidy established with regard to this type of subsidies during the IP for the sampled exporting producers was as follow:

(392)

No financial contribution was received by the sampled exporting producers from the remaining grant programmes mentioned in section 3.3(iii) above during the IP.

(393)

The total subsidy amounts established with regard to all grants during the IP for the sampled exporting producers were as follows: