A-570-053 Investigation Public Document E&C VI: MJH/TB MEMORANDUM FOR: Gary Taverman Deputy Assistant Secretary for Antidumping and Countervailing Duty Operations, performing the non-exclusive functions and duties of the Assistant Secretary for Enforcement and Compliance THROUGH: P. Lee Smith Deputy Assistant Secretary for Policy and Negotiations James Maeder Senior Director, performing the duties of the Deputy Assistant Secretary for AD/CVD Operations Robert Heilferty Acting Chief Counsel for Trade Enforcement and Compliance Albert Hsu Senior Economist, Office of Policy FROM: Leah Wils-Owens Office of Policy, Enforcement & Compliance DATE: October 26, 2017 SUBJECT: China’s Status as a Non-Market Economy Contents EXECUTIVE SUMMARY ............................................................................................................ 4 INTRODUCTION AND BACKGROUND ................................................................................... 8 SUMMARY OF COMMENTS FROM PARTIES......................................................................... 9 ANALYSIS ................................................................................................................................... 11 Factor One: The extent to which the currency of the foreign country is convertible into the currency of other countries. .......................................................................................................... 12 A. Framework of the Foreign Exchange Regime ................................................................ 12 B. Capital Account Restrictions .......................................................................................... 13 C. Foreign Exchange Market and the Exchange Rate Regime ........................................... 14 D. Assessment of Factor ..................................................................................................... 19 Factor Two: The extent to which wage rates in the foreign country are determined by free bargaining between labor and management. ................................................................................. 20 A. Legal and Institutional Framework ................................................................................ 20 B. Constraints on Wage Formation ..................................................................................... 23 1. Wage Growth Trends.................................................................................................. 23 2. Labor Law Dispute Resolution ................................................................................... 25 3. Trade Unions and Collective Bargaining ................................................................... 26 4. The Hukou System ..................................................................................................... 28 C. Assessment of Factor ..................................................................................................... 30 Factor Three: The extent to which joint ventures or other investments by firms of other foreign countries are permitted in the foreign country. ............................................................................. 32 A. Legal and Institutional Framework ................................................................................ 32 1. Laws Establishing FIEs .............................................................................................. 32 2. Foreign Investment Catalogue .................................................................................... 33 3. Foreign Investment Approval Process ........................................................................ 35 B. Constraints on Foreign Investment ................................................................................ 38 1. Foreign Investment Trends ......................................................................................... 38 2. Equity Limits and Local Partner Requirements ......................................................... 40 3. Investment Approval and Regulatory Process............................................................ 44 4. Technology Transfer and Localization Requirements ................................................ 47 5. Anti-Monopoly Law Enforcement and National Security Reviews ........................... 49 C. Assessment of Factor ..................................................................................................... 51 Factor Four: The extent of government ownership or control of the means of production. ......... 52 A. State-Invested Enterprise (SIE) Sector ........................................................................... 52 1. Legal and Institutional Framework............................................................................. 52 2. The Prevalence of SIEs in China’s Economy ............................................................. 58 3. Bankruptcy, Consolidations and State Enterprise Groups.......................................... 69 4. Government and CCP Influence over the Behavior of SIEs ...................................... 82 B. Land and Land-Use Rights ............................................................................................. 94 2 1. Legal and Institutional Framework............................................................................. 95 2. Barriers to the Efficient Allocation of Land Resources ........................................... 107 C. Assessment of Factor ................................................................................................... 115 Factor Five: The extent of government control over the allocation of resources and over the price and output decisions of enterprises. ............................................................................................ 117 A. Industrial Policies ......................................................................................................... 117 1. Framework of State Planning and Industrial Policymaking ..................................... 118 2. Implementation Mechanisms for Industrial Policies ................................................ 131 3. Examples of Industrial Policy Implementation ........................................................ 141 4. Supply-Side Structural Reforms ............................................................................... 149 B. Price Regulation ........................................................................................................... 158 1. The Prevalence of Price Distortions ......................................................................... 158 2. The Status of Formal Price Controls ........................................................................ 159 C. The Financial Sector ..................................................................................................... 167 1. Institutional Features of the Formal Banking Sector ................................................ 168 2. Interest Rate Controls and Dynamics ....................................................................... 171 3. Shadow Banking ....................................................................................................... 173 4. Bond Markets ........................................................................................................... 176 D. Assessment of Factor ................................................................................................... 178 Factor Six: Such other factors as the administering authority considers appropriate. ................ 181 A. China’s Legal System and the CCP ............................................................................. 181 1. The Legislature ......................................................................................................... 182 2. The Judicial System .................................................................................................. 184 B. Administrative Law and Regulatory Transparency ..................................................... 188 1. Administrative Litigation Law ................................................................................. 189 2. Administrative Reconsideration Law ....................................................................... 190 3. Regulatory Transparency .......................................................................................... 191 C. Corruption .................................................................................................................... 192 D. Assessment of Factor ................................................................................................... 194 FINAL ASSESSMENT .............................................................................................................. 196 APPENDIX ................................................................................................................................. 198 LIST OF ABBREVIATIONS ..................................................................................................... 202 3 EXECUTIVE SUMMARY The Department of Commerce (“Department”) concludes that China is a non-market economy (NME) country because it does not operate sufficiently on market principles to permit the use of Chinese prices and costs for purposes of the Department’s antidumping analysis. The basis for the Department’s conclusion is that the state’s role in the economy and its relationship with markets and the private sector results in fundamental distortions in China’s economy. At its