Coated Free Sheet Paper From the People's Republic of China: Amended Preliminary Affirmative Countervailing Duty Determination, 17484-17498 [E7-6498]

Agencies

• DEPARTMENT OF COMMERCE
• International Trade Administration

[Federal Register Volume 72, Number 67 (Monday, April 9, 2007)]
[Notices]
[Pages 17484-17498]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-6498]


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DEPARTMENT OF COMMERCE

International Trade Administration

[C-570-907]


Coated Free Sheet Paper From the People's Republic of China: 
Amended Preliminary Affirmative Countervailing Duty Determination

AGENCY: Import Administration, International Trade Administration, 
Department of Commerce.
SUMMARY: The Department of Commerce preliminarily determines that 
countervailable subsidies are being provided to producers and exporters 
of coated free sheet paper from the

[[Page 17485]]

People's Republic of China. For information on the estimated subsidy 
rates, see the ``Suspension of Liquidation'' section of this notice. 
The version released on Friday, March 30, 2007, contained a 
``Benchmarks'' section that was intended to be deleted from the final 
version because it was duplicative, so this amended preliminary 
determination corrects that error. This error was discovered prior to 
publication in the Federal Register, consequently, this amendment is 
being published in its place.

EFFECTIVE DATE: April 9, 2007.

FOR FURTHER INFORMATION CONTACT: David Layton or David Neubacher, AD/
CVD Operations, Office 1, Import Administration, International Trade 
Administration, U.S. Department of Commerce, 14th Street and 
Constitution Avenue, NW., Washington, DC 20230; telephone: (202) 482-
0371 or (202) 482-5823, respectively.

SUPPLEMENTARY INFORMATION:

Case History

    The following events have occurred since the publication of the 
Department of Commerce's (the Department) notice of initiation in the 
Federal Register. See Notice of Initiation of Countervailing Duty 
Investigations: Coated Free Sheet Paper From the People's Republic of 
China, Indonesia and the Republic of Korea, 71 FR 68546 (November 27, 
2006) (Initiation Notice).
    On December 1, 2006, the Department selected the two largest 
Chinese producers/exporters of coated free sheet paper, Gold East Paper 
(Jiangsu) Co., Ltd. (Gold East) and Shandong Chenming Paper Holdings 
Ltd. (Chenming) as mandatory respondents. See Memorandum to Stephen J. 
Claeys, Deputy Assistant Secretary for Import Administration, 
``Respondent Selection'' (December 1, 2006). This memorandum is on file 
in the Department's Central Records Unit in Room B-099 of the main 
Department building (CRU). On December 4, 2006, we issued the 
countervailing duty (CVD) questionnaire to the Government of the 
People's Republic of China (GOC), Gold East and Chenming.
    On December 29, 2006, the International Trade Commission (ITC) 
issued its affirmative preliminary determination that there is a 
reasonable indication that an industry in the United States is 
materially injured by reason of allegedly subsidized imports of coated 
free sheet paper (CFS) from China, Indonesia, and Korea. See Coated 
Free Sheet Paper China, Indonesia, and Korea, Investigation Nos. 701-
TA-444-446 (Preliminary) and 731-TA-1107-1109 (Preliminary), 71 FR 
78464 (December 29, 2006).
    Also on December 29, 2006, we published a postponement of the 
preliminary determination of this investigation until March 30, 2007. 
See Coated Free Sheet Paper From Indonesia, the People's Republic of 
China, and the Republic of Korea: Notice of Postponement of Preliminary 
Determinations in the Countervailing Duty Investigations, 71 FR 78403 
(December 29, 2006).
    We received responses from the GOC on December 11, 2006 and January 
31, 2007, Gold East on January 31, 2007, and Chenming on February 2, 
2007. On February 9, 2007, the petitioner, New Page Corporation, and 
the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, 
Allied Industrial and Service Workers International Union, AFL-CIO-CLC 
(USW), a domestic interested party, submitted comments regarding these 
questionnaire responses. We issued supplemental questionnaires to Gold 
East and Chenming on February 15, 2007, and to the GOC on February 21, 
2007. We received responses to these supplemental questionnaires from 
the GOC on March 15, 2007, Chenming on March 12, 2007, and Gold East on 
March 9 and 13, 2007. We issued a second supplemental questionnaire to 
the GOC, Gold East and Chenming on February 22, 2007, and received 
responses to these questionnaires from Chenming on March 12, 2007, and 
the GOC and Gold East on March 15, 2007.
    On February 20, 2007, the USW submitted two new subsidy 
allegations. These allegations were timely as they were filed 40 days 
prior to the scheduled date of the preliminary determination, in 
accordance with 19 CFR 351.301(d)(4)(i)(A). We decided to include both 
of these newly alleged programs in our investigation. See Memorandum to 
Susan Kuhbach, Office Director, ``New Subsidy Allegation'' (March 5, 
2007). On March 7, 2007, we issued a questionnaire to each of the 
respondents with respect to the new programs. We received responses to 
these questionnaires from Gold East on March 15, 2007, and from the GOC 
and Chenming on March 19, 2007.
    On March 8, 2007, the petitioner submitted comments for 
consideration in the preliminary determination. The USW filed comments 
on March 14, 2007. We also received comments from Gold East on March 
20, 2007, and March 22, 2007.
    On March 26, 2007, petitioner requested that the final 
determination of this countervailing duty investigation be aligned with 
the final determinations in the companion antidumping duty 
investigations in accordance with section 705(a)(1) of the Act. We will 
address this request in a separate Federal Register notice.

Period of Investigation

    The period for which we are measuring subsidies, or the period of 
investigation (POI), is calendar year 2005.

Scope of the Investigation

    The merchandise covered by this investigation includes coated free 
sheet paper and paperboard of a kind used for writing, printing or 
other graphic purposes. Coated free sheet paper is produced from not 
more than 10 percent by weight mechanical or combined chemical/
mechanical fibers. Coated free sheet paper is coated with kaolin (China 
clay) or other inorganic substances, with or without a binder, and with 
no other coating. Coated free sheet paper may be surface-colored, 
surface-decorated, printed (except as described below), embossed, or 
perforated. The subject merchandise includes single- and double-side-
coated free sheet paper; coated free sheet paper in both sheet or roll 
form; and is inclusive of all weights, brightness levels, and finishes. 
The terms ``wood free'' or ``art'' paper may also be used to describe 
the imported product.
    Excluded from the scope are: (1) Coated free sheet paper that is 
imported printed with final content printed text or graphics; (2) base 
paper to be sensitized for use in photography; and (3) paper containing 
by weight 25 percent or more cotton fiber.
    Coated free sheet paper is classifiable under subheadings 
4810.13.1900, 4810.13.2010, 4810.13.2090, 4810.13.5000, 4810.13.7040, 
4810.14.1900, 4810.14.2010, 4810.14.2090, 4810.14.5000, 4810.14.7040, 
4810.19.1900, 4810.19.2010, and 4810.19.2090 of the Harmonized Tariff 
Schedule of the United States (HTSUS). While HTSUS subheadings are 
provided for convenience and customs purposes, our written description 
of the scope of these investigations is dispositive.

Scope Comments

    In accordance with the preamble to the Department's regulations, in 
our Initiation Notice we set aside a period of time for parties to 
raise issues regarding product coverage, and encouraged all parties to 
submit comments within 20 calendar days of publication of the 
Initiation Notice. See Antidumping Duties; Countervailing Duties, 62 FR 
27296, 27323, (May 19,

[[Page 17486]]

1997) (Preamble) and Initiation Notice, 71 FR at 68546.
    On December 18, 2006, respondents in the antidumping duty 
investigation of CFS from Indonesia submitted timely scope comments. On 
January 12, 2007, the Department requested that the respondents file 
these comments on the administrative record of the CFS Investigations. 
See Memorandum from Alice Gibbons to The File (January 12, 2007). On 
January 12, 2007, the respondents re-filed these comments on the 
administrative record of the CFS Investigations. On January 19, 2007, 
the petitioner filed a response to these comments.
    The respondents requested that the Department exclude from its 
investigations cast-coated free sheet paper. The Department analyzed 
this request, together with the comments from the petitioner, and 
determined that it is not appropriate to exclude cast-coated free sheet 
paper from the scope of these investigations. See Memorandum to Stephen 
J. Claeys, Deputy Assistant Secretary for Import Administration, 
``Request to Exclude Cast-Coated Free Sheet Paper from the Antidumping 
Duty and Countervailing Duty Investigations on Coated Free Sheet 
Paper,'' (March 22, 2007) (memorandum is on file in the Department's 
CRU).

Application of the Countervailing Duty Law to Imports from the PRC

    On December 15, 2006, the Department requested public comment on 
the applicability of the countervailing duty law to imports from the 
People's Republic of China (PRC). See Application of the Countervailing 
Duty Law to Imports from the People's Republic of China: Request for 
Comments, 71 FR 75507 (December 15, 2006). The comments we received are 
on file in the Department's CRU, and can be accessed on the Web at 
https://ia.ita.doc.gov/ia-highlights-and-news.
    Informed by those comments and based on our assessment of the 
differences between the PRC's economy today and the Soviet and Soviet-
style economies that were the subject of Georgetown Steel Corp. v. 
United States, 801 F.2d 1308 (Fed. Cir. 1986), we preliminarily 
determine that the countervailing duty law can be applied to imports 
from the PRC. Our analysis is presented in a separate memorandum, 
Memorandum to David M. Spooner, Assistant Secretary for Import 
Administration, ``Countervailing Duty Investigation of Coated Free 
Sheet Paper from the People's Republic of China: Whether the analytical 
elements of the Georgetown Steel holding are applicable to the PRC's 
present-day economy,'' (March 29, 2007) (``Georgetown Memo'') 
(memorandum is on file in the Department's CRU).

Subsidies Valuation Information

Allocation Period

    The average useful life (``AUL'') period in this proceeding as 
described in 19 CFR 351.524(d)(2) is 13 years according to the U.S. 
Internal Revenue Service's 1977 Class Life Asset Depreciation Range 
System. No party in this proceeding has disputed this allocation 
period.

Attribution of Subsidies

    The Department's regulations at 19 CFR 351.525(b)(6)(i) state that 
the Department will normally attribute a subsidy to the products 
produced by the corporation that received the subsidy. However, 19 CFR 
351.525(b)(6) directs that the Department will attribute subsidies 
received by certain other companies to the combined sales of those 
companies if (1) cross-ownership exists between the companies, and (2) 
the cross-owned companies produce the subject merchandise, are a 
holding or parent company of the subject company, produce an input that 
is primarily dedicated to the production of the downstream product, or 
transfer a subsidy to a cross-owned company. The Court of International 
Trade (CIT) has upheld the Department's authority to attribute 
subsidies based on whether a company could use or direct the subsidy 
benefits of another company in essentially the same way it could use 
its own subsidy benefits. See Fabrique de Fer de Charleroi v. United 
States, 166 F. Supp. 2d. 593, 604 (CIT 2001).
    According to 19 CFR 351.525(b)(6)(vi), cross-ownership exists 
between two or more corporations where one corporation can use or 
direct the individual assets of the other corporation(s) in essentially 
the same ways it can use its own assets. This section of the 
Department's regulations states that this standard will normally be met 
where there is a majority voting interest between two corporations or 
through common ownership of two (or more) corporations.
    Chenming: Chenming reported that it is the only producer of CFS 
among the companies affiliated with Shandong Chenming Paper Holdings, 
Ltd. Chenming further reported that its pulp supplier did not receive 
subsidies from the GOC. Therefore, we are attributing the subsidies 
received by Chenming to its sales of CFS or total sales, as 
appropriate.
    Gold East: Gold East has responded to the Department's original and 
supplemental questionnaires on behalf of itself, its parent company and 
Gold Huasheng Paper Co., Ltd. (GHS). Gold East reported that GHS 
produces CFS, but that GHS did not produce CFS that is subject to 
investigation during the POI.
    Gold East has also acknowledged that it and GHS are affiliated with 
a domestic pulp supplier that provides inputs to both companies. Gold 
East asserts, however, that the pulp supplied by this company cannot be 
considered an ``input product'' within the meaning of 19 CFR 
351.525(b)(6)(iv) because the pulp provided by this supplier is not 
suitable for use in the CFS paper that is exported to the United 
States. Instead, this pulp was used exclusively in the production of 
lower-end paper products that were sold in the PRC and would not meet 
the specifications of its U.S. customers. Furthermore, Gold East states 
that it and GHS strictly segregate the pulp provided by the domestic 
supplier and the pulp used in export sales. Gold East claims that its 
situation is analogous to that in Cold-Rolled Steel Flat Products from 
Korea,\1\ where the Department did not find a subsidy because the input 
allegedly sold for less than adequate remuneration was not used to 
produce subject merchandise. Therefore, Gold East argues that the pulp 
provided by the domestic supplier is not an input product that is 
primarily dedicated to the production of the subject merchandise.
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    \1\ See Notice of Preliminary Affirmative Countervailing Duty 
Determination and Alignment of Final Countervailing Duty 
Determination with Final Antidumping Duty Determination: Certain 
Cold-Rolled Carbon Steel Flat products From the Republic of Korea, 
67 FR 9685, 9683 (March 4, 2002) (Cold-Rolled Steel Flat Products 
from Korea).
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    Based on information currently on the record, we preliminarily 
determine that because of common ownership, cross-ownership exists 
between Gold East, GHS, the parent company, the affiliated pulp 
supplier and other affiliated companies, in accordance with 19 CFR 
351.525(b)(6)(vi).
    We further preliminarily determine that Gold East and GHS are 
cross-owned producers of the subject merchandise, as addressed in 19 
CFR 351.525(b)(6)(ii). Although Gold East has claimed that GHS did not 
produce subject merchandise during the POI, there is no evidence 
indicating that GHS could not produce subject merchandise. Therefore, 
the subsidies received by Gold East and GHS have preliminarily been 
attributed to the combined sales of the two companies. Although we have 
combined Gold East and GHS in this

[[Page 17487]]

manner, we have continued to refer the respondent as ``Gold East'' in 
this notice.
    Additionally, we preliminarily determine that subsidies received by 
Gold East's parent company should be attributed to the consolidated 
sales of the parent company and its subsidiaries. See 19 CFR 
351.525(b)(6)(iii).
    Finally, we preliminarily determine that subsidies received by Gold 
East's cross-owned pulp supplier should be attributed to the combined 
sales of the input and the downstream products produced from those 
inputs. This is consistent with the Department's prior determination 
that pulp is ``primarily dedicated'' to the production of paper, as 
required by 19 CFR 351.525(b)(6)(iv). See Final Affirmative 
Countervailing Duty Determination and Final Negative Determination of 
Critical Circumstances: Certain Lined Paper Products from Indonesia, 71 
FR 47174 (August 16, 2006), and accompanying Issues and Decision 
Memorandum at Comment 3. Moreover, absent a showing that the domestic 
pulp cannot be used to produce CFS sold to the United States, there is 
no basis to tie subsidies bestowed on these input products exclusively 
to sales in the domestic Chinese market.
    Certain other of Gold East's affiliated companies are discussed in 
a separate, proprietary memorandum, Memorandum to Susan Kuhbach, ``Gold 
East: Cross-owned Companies'' (March 29, 2007) (memorandum is on file 
in Department's CRU).

Benchmarks

    Summary: The Department is investigating loans received by 
respondents from Chinese banks, including state-owned commercial banks 
(SOCBs), which are alleged to have been granted on a preferential, non-
commercial basis. Section 771(5)(E)(ii) of the Act explains that the 
benefit for loans is the ``difference between the amount the recipient 
of the loan pays on the loan and the amount the recipient would pay on 
a comparable commercial loan that the recipient could actually obtain 
on the market.'' Normally, the Department uses comparable commercial 
loans reported by the company for benchmarking purposes. See 19 CFR 
351.505(a)(2)(i). However, the Department does not treat loans from 
government banks as commercial if they were provided pursuant to a 
government program. See 19 CFR 351.505(a)(2)(ii). Because the loans 
provided to the respondents by SOCBs are under the ``Government Policy 
Lending Program,'' explained below, these loans are the very loans for 
which we require a suitable benchmark. Additionally, if respondents 
received any loans from foreign banks, these would be unsuitable for 
use as benchmarks because, as explained in greater detail below, the 
GOC's intervention in the banking sector creates significant 
distortions, even restricting and influencing foreign banks within the 
PRC.
    If the firm did not have any comparable commercial loans during the 
period, the Department's regulations provide that we ``may use a 
national interest rate for comparable commercial loans.'' See 19 CFR 
351.505(a)(3)(ii). However, the Chinese national interest rates are not 
reliable as benchmarks for these loans because of the pervasiveness of 
the GOC's intervention in the banking sector. Loans provided by Chinese 
banks reflect significant government intervention and do not reflect 
the rates that would be found in a functioning market. The statute 
directs that the benefit is normally measured by comparison to a ``loan 
that the recipient could actually obtain on the market.'' Section 
771(5)(E)(ii) of the Act. Thus, the benchmark should be a market-based 
benchmark, yet, there is not a functioning market for loans within the 
PRC. Therefore, because of the special difficulties inherent in using a 
Chinese benchmark for loans, the Department is selecting a market-based 
benchmark that is a simple average of the national lending rates for 
countries with comparable gross national income (GNI), as explained 
below. The use of an external benchmark is consistent with the 
Department's practice. For example, in Softwood Lumber, the Department 
used U.S. timber prices to measure the benefit for government provided 
timber in Canada. See Final Results of the Countervailing Duty 
Investigation of Certain Softwood Lumber Products from Canada, 67 FR 
15545 (April 2, 2002), and accompanying Issues and Decision Memorandum, 
at ``Provincial Stumpage Programs'' (``Softwood Lumber''). In the 
current proceeding, as described in detail, below, the GOC plays a 
predominant role in the banking sector resulting in significant 
distortions that render the lending rates in the PRC unsuitable as 
market benchmarks. Therefore, as in lumber, where domestic prices are 
not reliable, we have resorted to prices outside the PRC.
    Discussion: In its analysis of the PRC as a non-market economy in 
the recent lined paper investigation, the Department found that the 
PRC's banking sector does not operate on a commercial basis and is 
subject to significant distortions, primarily arising out of the 
continued dominant role of the government in the sector. See ``the 
People's Republic of China (PRC) Status as a Non-Market Economy,'' May 
15, 2006 (``May 15 Memorandum''); and ``China's Status as a Non-Market 
Economy,'' August 30, 2006 (``August 30 Memorandum'') (collectively, 
the ``memoranda''). The PRC's stated goal for banking sector reforms 
since 1994 has been to develop banks that operate on a commercial 
basis. See May 15 Memorandum at 4; and August 30 Memorandum at 56-58. 
Despite ongoing efforts made by the GOC to move toward this goal, SOCBs 
in the PRC continue to be plagued by functional and operational 
problems that have necessitated repeated, large government capital 
injections and debt write-offs to stave off insolvency. In addition to 
a chronic problem of non-performing loans, the Department discussed in 
its memoranda the aspects of the PRC's banking sector that led 
International Monetary Fund (IMF) economists to conclude in 2006 that, 
despite a decade of reform, ``it is difficult to find solid empirical 
evidence of a strong shift to commercial orientation by the SOCBs.'' 
See August 30 Memorandum at 58, citing ``Progress in China's Banking 
Sector Reforms: Has Bank Behaviour Changed?,'' Washington, DC: 
International Monetary Fund Working Paper, at 4 (March 2006). For 
example, the Department found that funds continue to be allocated in a 
``manner consistent with the general policy to maintain the state-owned 
industrial sector'' and loan pricing remains undifferentiated, despite 
liberalization of lending caps. See May 15 Memorandum at 5; and August 
30 Memorandum at 58.
    As one commentator notes, the PRC's banking sector has ``fallen 
short in its task of allocating credit to the most productive players 
in the economy,'' which is the hallmark of a banking system operating 
on a commercial basis. See August 30 Memorandum at 54, citing ``Putting 
China's Capital to Work: The Value of Financial System Reform,'' 
McKinsey & Company, at 25 (May 2006). The Department concluded that the 
PRC's banks are ``still in the process of developing the institutional 
underpinnings and human resources necessary to operate on a fully 
commercial basis.'' See August 30 Memorandum at 52.
    In addition, ``the various levels of government in the PRC, 
collectively, have not withdrawn from the role of resource allocator in 
the financial sector, principally the banking sector.'' See May 15 
Memorandum at 3. The GOC's continued ownership of virtually all of the 
banking sector assets is ``the

[[Page 17488]]

fundamental gap in banking sector's reform'' inhibiting the sector from 
operating on a commercial basis. Id. at 3-4. In fact, the PRC has the 
highest level of state ownership of banks of any major economy in the 
world. The four largest SOCBs, the Bank of China (``BOC''), the China 
Construction Bank (``CCB''), the Agricultural Bank of China (``ABC'') 
and the Industrial and Commercial Bank of China (``ICBC''), 
(collectively, the ``Big Four''), represent over 50 percent of the 
formal sector's assets and deposits. Small state-owned institutions, 
such as rural credit cooperatives, which are characterized by extremely 
poor performance, account for 9-10 percent of banking assets. Foreign 
banks account for approximately 2 percent of total assets. Although 
limited ownership diversification has been introduced through minority 
foreign shareholdings in the BOC, CCB and the joint-stock commercial 
banks (with the latter category of banks accounting for 13 percent of 
the sector's assets), the GOC continues to control the vast majority of 
financial intermediation in the banking sector. A further portion of 
the PRC's banking sector is accounted for by smaller entities, such as 
city banks and credit cooperatives, which are likewise government-
owned, albeit on a sub-central level. See August 30 Memorandum at 54-
55, citing ``Economic Survey of China,'' Paris: Organization for 
Economic Cooperation and Development, at 139 (2005).
    While foreign banks have recently been permitted to purchase 
minority stakes in a number of state-owned domestic Chinese banks, such 
investment does not signal a decisive shift towards putting the banks 
on a fully commercial footing. This is because foreign investment in 
PRC banks is tightly constrained, and the GOC has signaled its 
intentions to preserve its control over the banking sector 
indefinitely. See August 30 Memorandum at 61, citing ``Go Away, 
Crocodiles?,'' the Economist Intelligence Unit, Business China (March 
27, 2006). Continued GOC control of the Chinese banking sector is 
possible because, while foreign banks have recently been allowed to 
purchase minority stakes in certain banks in the PRC, total foreign 
purchases of shares in existing SOBCs have been limited to 25 percent. 
See August 30 Memo at 60, citing ``It's so Far, so Good for China's 
Banking Sector,'' the Economist Intelligence Unit, Business China 
(March 27, 2006). Similarly, some domestic banks in the PRC are now 
listed on foreign stock exchanges, but majority control remains with 
the GOC. Foreign interests have acquired approximately 10 percent of 
the CCB, ICBC and BOC, and are afforded just one place on the board at 
each bank. See August 30 Memo at 61, citing ``What are the Prospects 
for Foreign Banks in China,'' the Economist Intelligence Unit, 
Viewswire, China Finance (March 15, 2006). These investments bring 
market expertise to the management and board of the state-owned banks, 
but the foreign-owned shares remain small, thereby limiting the degree 
of influence over bank operations. See August 30 Memo at 61, citing 
Overmyer, Michael, ``WTO: Year Five,'' the US-China Business Council, 
The China Business Review, at 2 (January--February 2006). Therefore, 
the constrained degree of foreign investment that the GOC has permitted 
in the domestic Chinese banking sector does not alter the Department's 
preliminary conclusion that the domestic PRC banking sector does not 
operate on a commercial basis.
    Because the GOC still dominates the domestic Chinese banking sector 
and prevents banks from operating on a fully commercial basis, the 
Department preliminarily determines that the interest rates of the 
domestic Chinese banking sector do not provide a suitable basis for 
benchmarking the loans provided to respondents in this proceeding. 
Moreover, while foreign-owned banks do operate in the PRC, they are 
subject to the same restrictions as the SOCBs, including a government-
imposed cap on deposit rates, which puts downward pressure on lending 
rates. In addition, foreign banks' share of assets and lending is 
negligible compared with the SOCBs. SOCBs issue most of the credit in 
the PRC and lend at rates close to the Central Bank's announced base 
lending rate. See ``Economic Survey of China,'' Paris: Organization for 
Economic Cooperation and Development, at 153 (2005) (``Economic Survey 
of China''). Accordingly, foreign banks participating in this system 
are inevitably influenced by this broader environment in the rates at 
which they issue loans. Additionally, while foreign banks are slowly 
increasing their participation in the domestic PRC banking sector, the 
OECD has observed that foreign banks, in addition to providing only a 
tiny share of credit in the PRC, still operate mostly in niche markets, 
rather than compete directly with the state-owned commercial banks. See 
August 30 Memorandum at 60, citing ``Economic Survey of China,'' at 
150-151. Therefore, foreign bank lending does not provide a suitable 
benchmark.
    The Department's conclusion that the lending rates offered by 
foreign banks do not offer a suitable benchmark because of the market-
distorting behavior of the GOC is consistent with the Department's 
determination in the countervailing duty investigation in Softwood 
Lumber. That case dealt with the provision of goods for less than 
adequate remuneration. The Department explained that, ``if there is no 
market benchmark price available in the country of provision, it is 
obviously impossible to determine adequacy of remuneration except by 
reference to sources outside the country.'' See Softwood Lumber at 
``Provincial Stumpage Programs.'' Further, ``a valid benchmark must be 
independent of the government price being tested; otherwise the 
benchmark may reflect the very market distortion the comparison is 
intended to detect.'' Id. In that proceeding, the Department determined 
that the small private market for timber in Canada was not a suitable 
basis for comparison because of the dominant position of the government 
in the marketplace. Id. This is quite similar to the fact pattern in 
the current proceeding, where a small private (foreign) sector exists 
alongside a vastly larger state-owned sector where a considerable 
portion of lending is not conducted on terms and conditions consistent 
with commercial considerations. Just as the prices in the private 
market for timber were found to be distorted by the presence of a 
largely state-controlled sector, lending rates by foreign banks in the 
PRC would be affected by the non-commercial lending rates of the much 
larger and dominant state-owned banks.
    On March 22, 2007, Gold East cited to the PRC's Accession Protocol 
and argued that before rejecting benchmarks within the PRC, the 
Department should ``adjust such prevailing terms and conditions before 
considering the use of terms and conditions prevailing outside China.'' 
However, it is not practical to adjust internal PRC lending rates for 
benchmarking the loans made by respondents. The distortions in the 
Chinese banking sector cannot be attributed to a single factor or set 
of factors that the Department could account for by adjusting an 
internal lending figure. Rather, this distorted sector is due to the 
PRC's history of government domination of the banking system and 
continuing ownership of the sector. Under these circumstances, for the 
purposes of this preliminary determination, it is necessary for the 
Department to disregard all internal benchmark data for loans.

[[Page 17489]]

    We now turn to the issue of choosing an external benchmark. 
Selecting an appropriate external interest rate benchmark is 
particularly important in this case because, unlike prices for certain 
commodities and traded goods, lending rates vary significantly across 
the world. Nevertheless, there is a broad inverse relationship between 
income levels and lending rates. In other words, countries with lower 
per capita gross national income (GNI) tend to have higher interest 
rates than countries with higher per capita GNI, a fact demonstrated by 
the lending rates across countries reported in International Financial 
Statistics. There are several possible explanations for this 
phenomenon. High-income countries generally have stronger market-
supporting institutions, which reduce the risk and transaction costs 
associated with lending. High income countries may also be more stable, 
further reducing perceived risk, and have high levels of credit in the 
economy, which helps to achieve economies of scale. For these reasons, 
the Department has determined that it is appropriate to use income 
level as a criterion for choosing the external lending rate to use as a 
benchmark.
    Nevertheless, relying on a single country's figure could introduce 
distortions in the benchmark calculation if, for example, the country's 
central bank temporarily tightened monetary policy to reduce 
inflationary pressures. Because such factors, and their effect on 
interest rates vary across countries, the Department has preliminarily 
determined that a cross-country average lending rate is the most 
appropriate benchmark rate in this proceeding. A lending rate averaged 
across countries with similar income levels to the PRC captures the 
broad relationship between income and interest rates, as well as the 
institutional and macroeconomic factors that affect interest rates. 
Moreover, a large number of the world's countries report comparable 
lending rates to International Financial Statistics, providing a 
suitable basis for calculating a cross-country average.
    The Department has used the country classifications of the World 
Bank to determine which countries to include in the benchmark average. 
The World Bank divides the world's economies into four categories, 
based on per capita GNI: Low income, lower-middle income, upper-middle 
income, and high income. The PRC, with its 2005 per capita GNI of 
$1740, falls into the lower-middle income category, a group that 
includes 58 countries as of July 2006. The Department then calculated 
an average of the lending rates that these countries reported to 
International Financial Statistics in 2005. This calculation excludes 
those economies that the Department considered to be non-market 
economies for antidumping purposes in 2005: the PRC, Armenia, 
Azerbaijan, Belarus, Georgia, Moldova, Turkmenistan, and Ukraine. The 
average necessarily also excludes any economy that did not report 
lending data to International Financial Statistics in 2005. The 
Department also excluded two aberrational countries, Angola, with a 
rate of 67.72 percent, and Brazil, with a rate of 55.38 percent. The 
Department then computed a simple average of 13.147 percent of the 
remaining 37 lending rates and used this average to determine whether a 
benefit existed for the loans received by Chenming and Gold East on 
their short-term loans in 2005. The resulting average provides an 
appropriate benchmark because the loan figures reported to 
International Financial Statistics represent base short-term lending 
rates in each reporting country.
    The lending rates reported in International Financial Statistics 
represent short-term lending, and there is no publicly available long-
term interest rate data. To identify and measure any benefit from long-
term loans, the Department developed a ratio of short-term and long-
term lending for 2005. The Department then applied this ratio to the 
benchmark short-term lending figure (using the methodology explained 
above) to impute a long-term lending rate. For example, for loans 
issued in 2000, the Department calculated an average of the 37 lower-
middle income countries' short-term lending rates in 2000. To convert 
the resulting short-term interest rate into a long-term rate, the 
Department calculated a ratio between short-term lending drawn from 
London Interbank Offered Rate (LIBOR) data and long-term interest rates 
from in the interest rate swap market. The ratio of the two figures 
provides an indication of the varying cost of money over different time 
periods. In this case, the Department computed a ratio of the average 
short-term LIBOR rate in 2005 and the prevailing interest rates on 
long-term (five-year) interest rate swaps reported by the Federal 
Reserve for the year in question. That is, if the long-term swap rate 
were 25 percent higher than the short-term LIBOR rate, the Department 
would inflate the average short-term lending rate by 25 percent to 
arrive at a long-term interest rate benchmark. This methodology is 
appropriate because the interest rate swap rates are based on short-
term LIBOR rates, and the ratio between them offers an estimate of the 
market consensus premium that borrowers would pay on a long-term loan 
over a short-term loan.

Creditworthiness

    The examination of creditworthiness is an attempt to determine if 
the company in question could obtain long-term financing from 
conventional commercial sources. See 19 CFR 351.505(a)(4). According to 
19 CFR 351.505(a)(4)(i), the Department will generally consider a firm 
to be uncreditworthy if, based on information available at the time of 
the government-provided loan, the firm could not have obtained long-
term loans from conventional commercial sources. In making this 
determination, according to 19 CFR 351.505(a)(4)(i)(A)-(D), the 
Department normally examines the following four types of information: 
(1) Receipt by the firm of comparable commercial long-term loans; (2) 
present and past indicators of the firm's financial health; (3) present 
and past indicators of the firm's ability to meet its costs and fixed 
financial obligations with its cash flow; and (4) evidence of the 
firm's future financial position. If a firm has taken out long-term 
loans from commercial sources, this will normally be dispositive of the 
firm's creditworthiness. However, if the firm is government-owned, the 
existence of commercial borrowings is not dispositive of the firm's 
creditworthiness. This is because, in the Department's view, in the 
case of a government-owned firm, a bank is likely to consider that the 
government will repay the loan in the event of a default. See 
Countervailing Duties; Final Rule, 63 FR 65348, 65367 (November 28, 
1998). For government-owned firms, we will make our creditworthiness 
determination by examining this factor and the other factors listed in 
19 CFR 351.505 (a)(4)(i).
    Chenming: The Shouguang State-Owned Asset Administration owned 
31.24 percent of Chenming during the POI. Therefore, for purposes of 
the creditworthiness determination, we are preliminarily treating 
Chenming as government-owned and are not considering the existence of 
commercial borrowing to be dispositive of the company's 
creditworthiness.
    Chenming's consolidated financial statements show that the Group 
had negative working capital in 2003 through 2005, and its cash flow 
was negative in 2005. In addition, the current and quick ratios were 
less than 1 during the same time period and have

[[Page 17490]]

consistently declined since 2001.\2\ Chenming's 2005 financial 
statements indicate that the Group has a large amount of short-term 
debt, and that working capital was applied in the expansion and 
construction of production facilities in the Group. Indeed, its annual 
reports show that the Group completed several large projects in 2004 
and 2005 (fixed assets increased by 83% from the end of 2003 to the end 
of 2005), including new facilities. While the net profit margin, times 
interest earned, return on assets, and return on equity have decreased 
since 2003, they are comparable to or greater than the Group's 2001 
ratios. The ``times interest earned'' ratio calculates the extent to 
which pre-tax income covers interest expense and creditors monitor it 
to gauge the risk of default. Cash flow to liabilities, which indicates 
bankruptcy risk, has been very variable since 2001. Debt-to-equity and 
debt-to-assets, two solvency ratios, have increased since 2001, and 
demonstrate that the Group has become more leveraged. Turnover, 
however, has increased by at least 20 percent each year since 2001. In 
addition, despite the negative working capital and negative net cash 
flow, the company continued to pay dividends in 2004 and 2005.
---------------------------------------------------------------------------

    \2\ See Memorandum to File, ``Creditworthiness Determination for 
Chenming,'' (March 29, 2007) (``Chenming Creditworthy Memo'') 
(providing the calculation of the financial ratios for 2001 through 
2005). It is the Department's standard practice to examine ratios 
for the years in which a creditworthiness determination is to be 
made and the three preceding years.
---------------------------------------------------------------------------

    In Chenming's consolidated 2005 financial statements, the auditors 
explained that the Group is exposed to liquidity risk because a 
significant percentage of the Group's capital funding requirements are 
financed through short-term bank borrowing. The company acknowledged 
this risk and intended to convert a significant portion of such short-
term debt to long-term debt in the near future. A December 2, 2005 
article in Euroweek, indicated that Sumitomo Mitsui Banking Corporation 
(a foreign bank) was arranging an $80 million three-year term-loan for 
Chenming. The article explains that the deal is the company's debut 
international loan, although the company was in the market in 2005 as a 
sponsor of an affiliated company project.\3\ The group also had a five-
year convertible bond issue in September 2004.
---------------------------------------------------------------------------

    \3\ See Chenming Creditworthy Memo.
---------------------------------------------------------------------------

    We note that the financial statements, upon which the above ratios 
have been calculated, are for the consolidated Chenming Group. In its 
response, Chenming submitted financial ratios based on the 
unconsolidated parent company, which is the responding company and, 
according to its response, the sole producer within the consolidated 
group of the merchandise under investigation. These ratios show that 
the parent company's current ratios for 2004 and 2005 are more than 1 
and its quick ratios are nearly 1, which indicate that the parent 
company is in a more liquid position. In addition, the time interest 
earned ratios for these years are stronger for the parent than for the 
Group. While Chenming has not submitted the unconsolidated financial 
statements upon which these ratios are based, the Department has found 
publicly available financial statements for Chenming for the first half 
2005, which show the financial information for the parent and the 
Group. These statements confirm that the current ratio for the parent 
company is greater than 1 and the quick ratio is substantially better 
for the parent than the Group. In addition, the parent had positive 
working capital, although its cash flow in the first half 2005 was 
negative.
    We find the ratios for the Chenming Group provide varying 
indications of the firm's financial creditworthiness. While working 
capital is negative, working capital is only a rough indication of 
changes in liquidity and supplemental analysis with other ratios is 
required. Working capital in this case is negative due in large part to 
the large amount of short-term liabilities. The liabilities in this 
case were used to finance Group expansion, which should provide for 
future sales increases. While a company with excellent long-term 
prospects could fail to realize them if forced into bankruptcy because 
it could not pay its short-term liabilities, there is no indication 
that this is the case for the Chenming Group.
    Indeed, Chenming acknowledges this risk and states its intention to 
mitigate it through the acquisition of long-term debt. The December 
2005 article cited above demonstrates that the company was likely to be 
successful in carrying out this intention. Moreover, there is no 
information on the record that Chenming has defaulted on any of its 
debt or failed to meet any of its financial obligations. To the 
contrary, it has even continued to pay dividends. Also, the record 
shows that Chenming has continued to borrow from private parties, as 
evidenced by the 2004 convertible bond issue. We note that while we 
have performed this analysis for the Chenming Group, the unconsolidated 
financial situation for the parent company, the respondent in this 
case, appears to be even better.\4\
---------------------------------------------------------------------------

    \4\ See Chenming Creditworthiness Memo.
---------------------------------------------------------------------------

    In summary, while certain financial ratios indicate some degree of 
financial distress, there are several factors that weigh against 
finding Chenming uncreditworthy, such as: Continuing annual sales 
growth, its positive net income in 2005, and its ability to meet its 
interest expenses and issue convertible bonds. Therefore, we 
preliminarily determine Chenming to be creditworthy in 2004 and 2005.
    Gold East: On March 8, 2007, the petitioner alleged that the APP 
companies, including Gold East, should be considered uncreditworthy 
beginning in 2001.
    On March 20, 2007, Gold East objected to petitioner's allegation on 
the grounds that it was untimely filed. Specifically, Gold East argues 
that any new subsidy allegation, including an allegation of 
uncreditworthiness, is due no later than 40 days before the scheduled 
date of the preliminary determination, citing 19 CFR 
351.301(d)(4)(i)(A).
    We disagree with Gold East that uncreditworthiness allegations must 
be filed within the same timeframe established for new subsidy 
allegations in 19 CFR 351.301(d)(4)(i)(A). Uncreditworthiness in and of 
itself is not a countervailable subsidy. Instead, it is a valuation 
issue that is properly addressed in the course of an investigation as 
long as parties have ample time to submit information and argument on 
the point. In this case, adequate time exists. Therefore, we have 
analyzed petitioner's allegation.
    According to 19 CFR 351.505(a)(6), the Department ``will not 
consider the uncreditworthiness of a firm absent a specific allegation 
by petitioner that is supported by information establishing a 
reasonable basis to believe or suspect that the firm is 
uncreditworthy.'' The petitioner has submitted financial ratios for the 
companies and has pointed to other evidence on the record. (Because 
this allegation is based almost exclusively on proprietary information, 
it is described in a separate memorandum, Memorandum to Susan Kuhbach, 
``Uncreditworthiness Allegation for APP Companies'' (March 29, 2007) 
(``APP Creditworthiness Allegation Memo'') (memorandum is on file in 
the Department's CRU).
    Based on our review of the allegation, we find that the petitioner 
has provided a reasonable basis to believe or suspect that the APP 
companies were uncreditworthy in 2001-2005. See APP Creditworthiness 
Allegation Memo.

[[Page 17491]]

Therefore, we intend to investigate the creditworthiness of the APP 
companies for those years between 2001 and 2005 in which the companies 
received subsidies under investigation in this case. We intend to make 
a preliminary finding on the companies' creditworthiness prior to our 
final determination and will provide the parties with an opportunity to 
comment on that finding.

Denominator

    In its March 20, 2007 filing, Gold East asks the Department to 
adjust its subsidy rate to reflect the fact that the company's exports 
to the United States are invoiced by an affiliate. Gold East claims 
that the Department previously made such an adjustment in Ball Bearings 
and Parts Thereof from Thailand; Final Results of Countervailing Duty 
Administrative Review, 57 FR 26646 (June 15, 1992) (``Ball Bearings 
from Thailand'').
    Based upon our review of Ball Bearings from Thailand and the 
information submitted by Gold East in support of its claim, it appears 
that the pattern of transactions differ in the two situations, and it 
is not clear that the adjustment is appropriate for Gold East's 
situation. However, we intend to seek further information and analyze 
this claim further for our final determination.

Analysis of Programs

    Based upon our analysis of the petition and the responses to our 
questionnaires, we determine the following:

I. Programs Preliminarily Determined To Be Countervailable

A. Grant Programs

    The petitioner alleged that the GOC, including local and provincial 
authorities, provide grants to CFS producers and their cross-owned 
companies, pursuant to five-year plans for the pulp and paper industry.
    The GOC has identified two grant programs that relate to this 
allegation: The State Key Technology Renovation Fund, and the Clean 
Production Technology Fund. The former is discussed below, and the 
latter is addressed under ``Programs Preliminarily Determined to be Not 
Used.''
The State Key Technology Renovation Project Fund
    The State Key Technology Renovation Project Fund program (``Key 
Technology Program'') was created pursuant to state circular 
GUOJINGMAOTOUZI (1999) No. 886 (Circular No. 886), and operates under 
the regulatory guidelines provided in Circular No. 886, including 
``Measures for the Administration of National Debt Special Fund for 
National Key Technological Renovation Project'' (``Special Fund 
Measures''), GUOJINGMAOTOUZI (1999) No. 122, GUOJINGMAOTOUZI (1999) No. 
1038 and state circular GUOJINGMAOTOUZI (2000) No. 822. The purpose of 
this program is to promote: (1) Technological renovation in key 
industries, key enterprises, and key products; (2) facilitation of 
technology upgrade; (3) improvement of product structure; (4) 
improvement of quality; (5) increase of supply; (6) expansion of 
domestic demand; and (7) continuous and healthy development of the 
state economy.
    Under the Key Technology Program, companies can apply for funds to 
cover the cost of financing specific technological renovation projects. 
Under Article 9 of the Special Fund Measures, Key Technology Program 
grants are disbursed in the form of ``project investment facility'' 
grants covering two years' worth of interest payable on loans to fund 
the project, or up to three years for enterprises located in certain 
regions. Under Article 11 of the Special Fund Measures, Key Technology 
Program funds may also be disbursed as ``loan interest grants,'' which 
are calculated with reference to the amount of the project loans and 
prevailing interest rates during a period of one to two years.
    Pursuant to Article 4 of Circular No. 886, the recipients of these 
funds will mainly be selected from large-sized state-owned enterprises 
and large-sized state holding enterprises among the 512 key 
enterprises, 120 pilot enterprise groups and the leading enterprises in 
industries. To be considered for funding, the enterprise files an 
application that is reviewed at various levels of government, with 
final approval given by the State Council. Once approved, the local 
finance bureaus appropriate the funds into the enterprise's account.
    The GOC has reported that Chenming was among the 512 key 
enterprises or 120 pilot enterprise groups, and that Gold East was not 
included in these groups. Also, the GOC reported approving funding for 
Chenming under the Key Technology Program in 2000, and that the funds 
were disbursed in 2001.
    The GOC has further reported that the Key Technology Program has 
not operated since 2003, although the implementing regulations remain 
in effect. This is due to institutional reform in the government--the 
implementing agency, the State Economic and Trade Commission, was 
dissolved and the program was not taken over by another agency.
    We preliminarily determine that the Key Technology Program provides 
countervailable subsidies to Chenming within the meaning of section 
771(5) of the Act. We find that these grants are a direct transfer of 
funds within the meaning of section 771(5)(D)(i) of the Act, providing 
a benefit in the amount of the grant. See 19 CFR 351.504(a). We further 
preliminarily determine that the grants provided under this program are 
limited as a matter of law to certain enterprises, i.e., large-sized 
state-owned enterprises and large-sized state holding enterprises among 
the 512 key enterprises, 120 pilot enterprise groups and the leading 
enterprises in industries, and, hence, are specific under section 
771(5A)(D)(i) of the Act.
    According to the GOC, the program is intended to provide one-time 
assistance and each project funded by the a grant requires a separate 
application and approval. Therefore, consistent with 19 CFR 
351.524(c)(1), we are treating the grant received under this program as 
``non-recurring.'' We do not have the information needed to perform the 
``expensing'' test described in 19 CFR 351.524(b)(2), and for purposes 
of this preliminary determination have allocated the benefit over the 
AUL.
    To calculate the countervailable subsidy, we used our standard 
grant methodology. Because the approved project was for CFS, we divided 
the benefits attributable to the POI by the total value of Chenming's 
sales of CFS during that period. On this basis, we preliminarily 
determine the countervailable subsidy to be 1.28 percent ad valorem for 
Chenming.
    As noted above, the grants provided under this program are to cover 
interest owed on loans. Our regulations provide differing allocation 
methodologies for interest assumptions, depending on whether the 
recipient knew of the assumption before taking out the loan. See 19 CFR 
351.508(c)(2). We intend to seek further information on this issue for 
our final determination.

B. Government Policy Lending Program

    Petitioner has alleged a GOC lending program to provide loans at a 
discount to the forestry and paper industry in accordance with the 
GOC's industrial policy, as set out, inter alia, in ``The PRC Civilian 
Economy and Social Development 10th Five-Year Plan Outline'' and ``The 
Tenth Five-Year and 2010 Special Plan for the Construction of National 
Forestry and Papermaking Integration Project.'' Petitioner further

[[Page 17492]]

alleges that discounted loans, interest subsidies, and debt forgiveness 
are provided through policy banks and state-owned banks providing 
policy loans.
    Chenming and Gold East have stated that they did not receive any 
preferential policy loans. In its response, the GOC states that the 
Five-Year plans are a ``projection of the {state-council's{time}  
economic work in the forthcoming years'' and are ``not necessarily 
translated into any specific action.'' As such, the GOC asserts that it 
does not normally provide loans to industries; rather, banks provide 
loans and operate as independent commercial entities, typically basing 
their decision to provide a loan on commercial and risk assessment 
factors.
    To determine whether the program alleged by petitioner confers 
countervailable subsidies on the producers and exporters of the subject 
merchandise, the Department must first ascertain whether the GOC has a 
program in place to support the development of the paper industry. 
Specifically, the Department must determine whether record evidence 
supports the conclusion that the GOC carries out industrial policies 
that encourage and support the growth of the paper sector through the 
provision of preferential loans.
    Petitioner has claimed that the GOC has an explicit policy of 
supporting the paper industry with preferential loans. To support this 
assertion, petitioner cites to the ``The PRC Civilian Economy and 
Social Development 10th Five-Year Plan Outline'' (10th Five-Year Plan) 
and ``The Tenth Five-Year and 2010 Special Plan for the Construction of 
National Forestry and Papermaking Integration Project'' (10th Five-Year 
Plan for the Forestry and Paper Industry), among other administrative 
measures.
    One of the goals of the 10th Five-Year Plan is to ``accelerate 
reform and renovation'' of certain industries, including the ``wood 
pulp, high quality paper and paperboard'' industry. Subsequent Five-
Year Plans have reaffirmed this goal. Taking into consideration the 
broad goals set out in the 10th Five-Year Plan, in March 2001 the GOC 
released the 10th Five-Year Plan for the Forestry and Paper Industry. 
This plan was developed ``in order to ensure the smooth construction of 
our national forestry and papermaking integration project, to make 
comprehensive plans, to take actions according to local circumstances, 
to make decisions on scientific bases, and for the government to play 
the role of macroeconomic readjustment and control'' (emphasis added). 
In addition, the government has established specific production 
capacity targets in this Plan, stating that ``{w{time} e plan to 
construct pulp producing capacity of 1.13 million ton'' and after 2010 
``we can build a pulp producing capacity of more than 2.15 million ton 
* * * and a matching paper making capacity of about 2.3 million ton.'' 
Further, the GOC estimates that the amount of investment required 
during the period of the 10th and 11th Five-Year Plans will be RMB 
244.3 billion, stating that, ``{t{time} herefore, investment has to be 
strengthened vigorously and financing channels are to be widened * * 
*'' As such, this Plan specifically contemplates policy measures that 
are necessary to achieve these goals, including the provision of 
``appropriate financial support to the construction of forestry and 
papermaking integration in its early phase by way of infusing capital 
in cash or loans with discount.''
    In addition to the 10th Five-Year Plan and the 10th Five-Year Plan 
for the Forestry and Paper Industry, in August 2001, the State Economic 
and Trade Commission released the ``10th Five-Year Plan in the Paper 
Production Industry.'' The purpose of this Plan is to outline goals of 
the paper production industry over the next 5 years. A key policy 
recommendation addressed in the plan is increased access to financial 
resources, including: (1) Opening essential financing channels for 
adjustment and development of the industry; (2) encouraging the opening 
of multilateral investment and financing channels to increase 
technological restructuring and rapid growth; and (3) providing 
discounted loans with special terms for environmental conservation 
projects.
    Beyond the various Five-Year Plans mentioned above, several 
additional administrative measures released by the GOC demonstrate a 
clear governmental policy or program of support to the forestry and 
paper industry. For example, in June 2000, The PRC's National Key 
Economy and Trade Committee released the National Key Technology 
Renovation ``Shuang Gao Yi You'' Project. The purpose of this measure 
was to outline key areas of economic structural adjustment needed by 
enterprises to increase technology renovation, technical and industrial 
advancement. One of the stated goals was to ``emphatically select key 
paper enterprises which produce high quality newspaper, high class 
culture paper product (LWC), high class packaging paperboard (carton 
paperboard), and enterprises that produce paper making machine and 
other supporting networks; eliminate backward equipment and products 
which are not market suitable.''
    On the basis of the record information cited above, we 
preliminarily determine that the GOC has a specific and detailed policy 
to encourage and support the development of the domestic forestry and 
paper industry. The GOC itself has stated that Five-Year Plans are a 
``projection of the [state-council's] economic work in the forthcoming 
years.'' In order to implement the policies enumerated in the Five-Year 
Plan, the GOC's policy specifically calls for the provision of 
discounted loans and other financing in order to support the growth and 
development of this industry.
    The GOC has further stated in its March 15 questionnaire response 
that ``the administrative system ensures that provincial and local 
policy goals and objectives are in conformity with the central policy 
goals and objectives.'' According to the 1979 Law of Local People's 
Congresses at Various Levels and Local People's Government at Various 
Levels of the PRC, as amended, local governments must follow the laws 
and regulations made by the central government. See Chinese Law and 
Legal Research, Wei Luo, at 31 (2005). Further,

the State Council guides the local administration in terms of 
policies and assigns tasks to local governments in terms of plans. 
In doing so, the central government confers on the local governments 
the necessary authorities to carry out the policies of the central 
government. The central government also evaluates the local 
governments' application of policies, laws and plans made by the 
central government. See id. (emphasis added.)

In other words, local governments must align their industrial policies 
with stated central government policies and carry out those polices to 
the extent that such measures affect their locality. As such, based on 
record statements, Five-Year Plans should be considered a central 
government policy or program that local governments adopt and implement 
through SOCBs.
    Having determined that the record evidence establishes a government 
policy or program to support the forestry and paper industry, the 
Department next turns to whether these policies were carried out by the 
central and local governments through the provision of loans extended 
by GOC policy banks and SOCBs. Under the Department's practice, loans 
provided by government policy banks, such as the China Development 
Bank, are considered government loans and, thus, constitute direct 
financial contributions under the Act. See, e.g., Dynamic

[[Page 17493]]

Random Access Memory Semiconductors from the Republic of Korea: Final 
Results of Countervailing Duty Administrative Review, 72 FR 7015, 
February 14, 2007, and accompanying Issues and Decision Memorandum, at 
6. Loans by SOCBs, however, are not necessarily treated as government 
loans because these banks often operate on a commercial basis in many 
countries. See Preamble, 63 FR at 65363. However, as discussed below, 
the PRC's banking system presents a significantly different fact 
pattern than those in market economy countries that the Department has 
previously encountered and that were contemplated in the Preamble. 
Information on the record indicates that the PRC's banking system 
suffers from a legacy of complete state control, the vestiges of which 
allow for continued government control, especially at the local level, 
resulting in the allocation of credit in accordance with government 
policies.
    As discussed in the Georgetown Memo and the Department's memoranda 
from the investigation on Certain Lined Paper Products from the PRC 
regarding the PRC's status as a non-market economy, the PRC's banking 
system is more flexible than the Soviet-style banking sectors, where 
central banks directly allocated all credit in accordance with the 
wishes of the party and the central planners. The GOC abolished the 
mandatory credit plan in 1997, under which the People's Bank of China 
(PBOC) directly allocated credit to specific sectors, often supporting 
the operations of loss-making state-owned enterprises (SOEs). The 
credit plan was replaced with non-binding targets, which were to serve 
as guidance for credit allocation. See August 30 Memorandum, at 51. 
SOCBs were afforded legal autonomy from the state in most matters, 
which allowed them to lend, at least in theory, on terms and conditions 
consistent with commercial considerations. Current law, however, 
remains contradictory with regard to the SOCB's independence from the 
state. Under the 1995 Commercial Banking Law of the People's Republic 
of China, commercial banks are responsible for their own profits and 
losses, must protect the interests of their depositors, and are 
protected from government influence. However, Article 34 of the 
Commercial Bank Law paradoxically states that banks are required to 
adhere to the PRC's ``national industrial policies.'' See August 30 
Memorandum, at 53.
    Notwithstanding certain dictates that the SOCBs act independently 
of the government, as discussed in the ``Benchmark'' section of this 
notice, the near-complete state ownership over these banks enables the 
GOC to utilize SOCBs as policy instruments and, thus, to allocate 
credit in accordance with its policies, as enumerated in the Five-Year 
Plans. Specifically, the Department found that ``{w{time} hile the Big 
Four (along with smaller regional banks and cooperatives) now have 
greater autonomy than in the past, government interests at both the 
central and local levels still exercise a great deal of control over 
banking operations and lending decisions.'' See May 15 Memorandum, at 
5. As noted by the IMF, ``{r{time} ooting out the legacy of government 
directed lending, and training banks to make lending decisions based on 
purely commercial considerations, with adequate regard to viability and 
riskiness of projects remains a major reform challenge.'' See August 30 
Memorandum, at 52, n. 248, citing Finance and Development, Next Steps 
for China, Washington, DC: International Monetary Fund, (September 
2005).
    State-direction of credit as well as protracted lending on a non-
commercial basis has been evidenced by repeated cycles of the 
accumulation of a large number of non-performing loans and government 
bailouts of the banking sector. See ``Benchmark'' section above. For 
example, wholly- and partially-owned SOEs continue to receive a 
disproportionate share of credit, in line with industrial policy 
objectives to maintain a central role for the state-owned sector