Study Of Chinese State-owned Subsidized Legal Issues Under The Wto Framework

As a transition economy state, China always considers the reform of Chinese state-owned enterprises (SOE) as one of the key issues in its reform schedule. Subsidies to Chinese SOEs are one of the important aspects of the reform of Chinese SOEs. What is more, because of the repaid development of China's foreign trade, subsidies to Chinese SOEs have a great impact on the international trade. Therefore, WTO, as a multilateral trade system, has put regulation on subsidies to Chinese SOEs. Although the original intention of this regulation is to ensure the international market mechanism would operate without distortion, however, considering the close relationship between subsidies to Chinese SOEs and Chinese domestic reform, the WTO rules regulating subsidies to Chinese SOEs would have a guiding function for Chinese domestic reform. As a result, this article would first analyze the WTO rules regulating subsidies to Chinese SOEs, and then, under the framework of these rules, several issues in Chinese domestic reform, like the reform of financial system, the reform of SOEs, would be discussed in details. In another word, this article would try to discuss these domestic issues under the perspective of international law.The development of subsidies to Chinese SOEs was closely related to the historical evolution of Chinese SOEs. The economic analysis on subsidies to Chinese state-owned enterprises reveals that whether there is a 'perfect market' should be considered. If there is a 'perfect market', then subsidies to Chinese SOEs would probably distort the operation of market system. If there is a 'market failure', then subsidies to Chinese SOEs may help correcting the failure. The reality is between these two presumptions. Therefore, the WTO rules need to make a balance. The rules relating subsidies to Chinese SOEs include the general rules and the special rules. The former includes article VI, XVI and XVII of GATT, SCM agreement; the latter includes article 10 and article 15 of the Protocol on the Accession of the People's Republic of China, paragraph 46 of the Report of the Working Party on the Accession of China.During the negotiation of China's access to the WTO, some members believe that, since China is still a transition economy state, the WTO should make some special rules for China so that this transition economy state could be compatible with the WTO, which is a market-oriented institution. The special rules on subsidies to Chinese SOEs are part of these special rules. Nevertheless, since the WTO becomes more and more legalistic, the special rules should be based on some jurisprudence so that they would not conflict with the general rules of the WTO. The interface theory by John Jackson can be applied as the jurisprudence basis of the special regulation on subsidies to Chinese SOEs. Jackson believes that the transition economy state, like China and Russia, are incompatible with the WTO, which is a market-oriented institution. On the other side, leaving these large transition economy states outside the WTO is also not beneficial for the WTO members. One possible approach is "two-track system": the WTO provides some special rules beside the general ones in order to regulate the special situation in the transition economy states. Moreover, the se special rules would guide the transition economy state to become a market economy state.The regulation on subsidies to Chinese SOEs under the WTO includes the following aspects:First, the requirement on the actor of subsidies to Chinese SOEs. Under the WTO, the actor conferring the subsidies is limited to the government, the public body and the private body entrusted or directed by the government. The actor receiving the subsidies is limited to the Chinese SOEs. This requirement on the actors of subsidies to Chinese SOEs would have an impact on the reform of financial system. In the Report of the Working Party on the Accession of China, some WTO members have identified state support through the banking system, notably state-owned banks, as subsidies. The requirement on the actors of subsidies to Chinese SOEs urges the state-owned banks to be more commercialized. The legal status of China Huijin Corporation, who is the majority shareholder of several state-owned banks, needs to be clarified in order to avoid possible subsidies disputes.Second, the requirement on the nature of subsidies to Chinese SOEs. An action which is deemed to be a subsidy to Chinese SOEs should be a financial contribution and a benefit is thereby conferred. When deciding whether China's refund of value-added tax to the export products constitutes a subsidy, the key point is the existence of benefit which is conferred by the refund. In another word, the refund of value-added tax should not exceed the indirect taxes which have been paid already. Regarding the 'transformation of subsidies' during the privation of SOEs, the practice of DSB reveals that only under the circumstance that the transfer of the equity of SOEs is based on the fair market value, then subsidies received by SOEs can be countervailed. Therefore, during the privation of Chinese small and medium SOEs and the SOEs at the non-important or non-key fields, in order to avoid the potential countervailing duty investigation in the future, the transfers of the equity of SOEs should be based on the fair market value in order to eliminate the subsidies received by the SOEs.Third, the specificity standard for subsidies to Chinese SOEs. Except the general rules of the specificity standard in the SCM agreement, the paragraph two of article 10 of the Protocol on the Accession of the People's Republic of China provides the special rule on the specificity standard for subsidies to Chinese SOEs. When applying this special rule, however, two factors should be considered: the extent of diversification of economic activities within the jurisdiction of the granting authority and the length of time during which the subsidy programme has been in operation. What is more, since article 8.2 of SCM agreement would be in no effect since Ist January, 2000, there would be no valid exception for the subsidies with the specificity, except for the minimum exception. Regarding the settlement resolution of the disputes regarding subsidies to Chinese SOEs, there are two methods: The first one is the domestic method, which settle the disputes through the domestic countervailing duty investigation. The second one is the international method, which settles the disputes through the dispute settlement mechanism under the WTO. Regarding the first one, more and more WTO members decide to apply its countervailing duty law to the non-market economy and the transition economy state, notably China. Regarding the second one, it is believed that article XXI of GATT, the security exception, shall not be applied to the disputes regarding subsidies to Chinese SOEs.Last but not the least, the regulation on subsidies to Chinese SOEs under the WTO has two functions: on one hand, it maintains the successful operation of the international market system so that the manufacturers within the jurisdiction of other WTO members can be at a leveling playing field with Chinese SOEs. On the other, it guides China's domestic economy to transit from the planned economy to the market economy.