Commission Implementing Regulation (EU) 2020/776 of 12 June 2020 imposing definitive countervailing duties on imports of certain woven and/or stitched glass fibre fabrics originating in the People's Republic of China and Egypt and amending Commission Implementing Regulation (EU) 2020/492 imposing definitive anti-dumping duties on imports of certain woven and/or stitched glass fibre fabrics originating in the People's Republic of China and Egypt

• (245) Following definitive disclosure, the GOC claimed that none of the regulatory documents relied upon by the Commission were sufficient to show that meaningful control had, in fact, been exercised by the GOC on EXIM. More specifically, the GOC argued that Article 34 of the Chinese Commercial Banking Law is nothing more than a general statement without any practical implications. The GOC added that Article 34 should not be read in isolation, but in conjunction with Articles 4, 5, and 41 of the Bank law relating allegedly to the bank's autonomy, and the lack of interference by entities, individuals or governments. The GOC also requested to disregard Article 15 of the General Rules on Loans, since it is not mandatory. Finally, the GOC stated that Decision No. 40 of the State Council was not binding, and referred to Article 17 of this Decision, according to which all financial institutions are required to make lending decisions based on market principles.

• (246) The Commission first recalled that, as mentioned in recital above, it considered that the Bank law and Decision No. 40 are mandatory. Furthermore, the findings of this investigation (as well as the Commission's findings in previous investigations concerning the same subsidy programme ⁶⁴) did not support the claim that banks do not take government policy and plans into account. The investigation rather showed that Article 15 of the General Rules on Loans was actually applied in practice, and that Articles 4, 5 and 41 of the Bank law were 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. For example, the Commission found that the exporting producers benefit from similarly low interest rates through preferential lending.

• (247) The Commission also noted that the Decision No. 40 of the state Council instructs all financial institutions to provide credit support only to encouraged projects and promises the implementation of ‘other preferential policies on the encouraged projects’. On the basis of the above, banks are required to provide credit support to the GFF industry. While Article 17 of the same Decision also asks the bank to respect credit principles, the Commission could not establish during the investigation that this was done in practice. Decision No. 40 hence confirmed the previous finding with respect to the Bank law that banks exercise governmental authority in the form of preferential credit operations.

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

• (249) The Commission also sought concrete proof of the exercise of control in a meaningful way based on concrete loans. During the verification visit, the cooperating State-owned bank maintained that in practice it had used sophisticated credit risk assessment policies and models when granting the loans at issue. However, as already indicated in recitals (187) to (190) above, no concrete examples relating to the sampled companies were provided. The cooperating State-owned bank refused to provide information, including its specific credit risk assessments, related to the sampled companies for regulatory reasons and contractual reasons even though the Commission had a written consent from the sampled companies waiving their confidentiality rights.

• (250) In the absence of concrete evidence of creditworthiness assessments, the Commission therefore examined the overall legal environment as set out above in recitals (238) to (245), in combination with the behaviour of the cooperating State-owned bank with regard to the loans provided to the sampled companies. This behaviour contrasted with its official stance during the verification visit, as in practice it was not acting based on thorough market-based risk assessments.

• (251) The verification visits revealed that, with the sole exception of certain loans in foreign currency, loans were provided to the two sampled groups of exporting producers at interest rates below or close to the People’s Bank of China (‘PBOC’) benchmark interest rates, regardless of the companies’ financial and credit risk situation. Hence, the loans were provided below market rates when compared to the rate corresponding to the risk profile of the sampled exporting producers. In addition, 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.

• (252) The Commission also found that loans which should have been reported by the banks as ‘not normal’ loans had not always been indicated as such in the national central credit register by the cooperating State-owned bank. The obligation to report such ‘not normal loans’ 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 the two sampled exporting producers. According to the CBIRC’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.

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

3.4.1.3.   Conclusion on cooperating financial institutions

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

3.4.1.4.   Non-cooperating State-owned banks

• (255) As set out in section 3.2 above, none of the other State-owned banks, which provided loans to the sampled companies, replied to the specific questionnaire. The CDB did not respond to the questionnaire, but was available for questions during the verification visit at the premises of MOFCOM. During this visit, the CDB stated that the statements it had made during a previous anti-subsidy investigation by the EU in 2012 were still valid, and that no major changes had occurred since then. The CDB did not provide any further detailed information on its governance structure, risk assessment or examples relating to specific loans to the GFF industry.

• (256) Therefore, in line with the conclusions reached in recitals (182) to (199) above, the Commission decided to use facts available to determine whether those State-owned banks qualify as public bodies.

• (257) In previous anti-subsidy investigations ⁶⁵, the Commission established that the following banks, which had provided loans to the sampled groups of exporting producers in the investigations at hand, were partially or fully owned by the State itself or by State-held legal persons: China Development Bank, China Construction Bank, Industrial and Commercial Bank of China, Bank of Communications, China Everbright Bank, Postal Savings Bank, China Merchants Bank, Shanghai Pudong Development Bank, China Industrial Bank, Shenyang Rural Commercial Bank, Bank of Shanghai, Ningbo Bank, China CITIC Bank, China Guangfa Bank, China Bohai Bank, Huaxia Bank, Hankou Bank, Hubei Bank, Huishang Bank, Dongying Bank, Bank of Tianjin, Bank of Kunlun, Shanghai Rural Commercial Bank, China Industrial International Trust Limited, Daye Trust Co., Ltd. and Sinotruk Finance Co., Ltd. Since no information has been provided indicating otherwise, the Commission maintained the same conclusion in the present investigation.

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

• (259) The Commission further established, 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 3.4.1.2. In particular, based on facts available, managers and supervisors in the non-cooperating State-owned banks would appear to be appointed by the GOC and be accountable to the GOC in the same manner as in the cooperating State-owned bank.

• (260) With regard to the exercise of control in a meaningful manner, the Commission considered that the findings concerning the cooperating financial institution could be considered representative also for the non-cooperating State-owned financial institutions. The normative framework analysed in Section 3.4.1.2 above applies to them in an identical manner. Absent any indication to the contrary, based on facts available, the lack of concrete evidence of creditworthiness assessments is valid for them in the same manner as for the cooperating State-owned bank, so that the analysis on the concrete application of the normative framework in Section 3.4.1.2 above applies to them in an identical manner.

• (261) 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 overlapped with the rates provided by the cooperating State-owned bank.

• (262) The Commission therefore considered that the findings for the cooperating state-owned bank constituted the facts available under Article 28 of the basic Regulation for assessing the other State-owned banks, due to those similarities in loan conditions and lending rates.

• (263) On that basis, the Commission concluded that the other State-owned banks, which provide loans to the sampled companies, are public bodies within the meaning of Article 2(b) read in conjunction with Article 3(1)(a)(i) of the basic Regulation.

• (264) Following definitive disclosure, the GOC argued that the Commission based itself only on previous investigations and indicia of formal control to establish that the non-cooperating State-owned banks were acting as public bodies. No separate analysis was performed for each bank. In addition, since EXIM is a policy bank, its situation could not be transposed to commercial banks

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

3.4.1.5.   Conclusion on State owned financial institutions

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

• (267) In addition, even if the State-owned financial institutions were not to be considered as public bodies, the Commission established that they would be considered entrusted or directed by the GOC to carry out functions normally vested in the government within the meaning of Article 3 (1)(a)(iv) of the basic Regulation for the same reasons, as set out in recitals (269) to (272) below. Thus, their conduct would be attributed to the GOC in any event.

3.4.1.6.   Entrustment or direction of private financial institutions

• (268) The Commission then turned to the remaining financial institutions. The following financial institutions were considered to be privately owned, based on the findings established in previous anti-subsidy investigations ⁶⁷, and complemented by publicly available information: China Minsheng Bank, Sumitomo Mitsui Banking (China) Co., Ltd, Standard Chartered Bank, Ping An Bank. For the following financial institutions, in the absence of cooperation and in the absence of sufficient publicly available information the Commission could not ascertain whether they were State-owned or privately owned: Chongqing Runyin Financial Leasing Co., Ltd., Wuxi International Platinum Co., Ltd., Liangjiang Financial Leasing Co., Ltd., Taian Bank and Taian Daiyue Rural Commercial Bank Co., Ltd. Following a conservative approach, the Commission analysed the latter in the same manner as privately owned financial institutions and they are referred hereafter as ‘privately owned financial institutions’. The Commission analysed whether these financial institutions had been entrusted or directed by the Government of China to grant subsidies to the GFF sector within the meaning of Article 3(1)(a)(iv) of the basic Regulation.

• (269) 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 ⁶⁸. In both cases, the government uses a private body as a proxy to make the financial contribution, and ‘in most cases, one would expect entrustment or direction of a private body to involve some form of threat or inducement’ ⁶⁹. 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’ ⁷⁰ 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’ ⁷¹. Rather, entrustment or direction implies ‘a more active role of the government than mere acts of encouragement’ ⁷².

• (270) The Commission noted that the normative framework concerning the industry mentioned above in recitals (238) to (245) applies to all financial institutions in the PRC, including privately owned financial institutions. To illustrate this, the Bank Law and the various orders of the CBIRC cover all Chinese-funded and foreign-invested banks under the management of the CBIRC.

• (271) 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.

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

• (273) After definitive disclosure, one of the parties argued that the fact that each of the sampled groups of companies benefitted from different types of loans or financial leasing during the investigation period with variances in respect of e.g. maturity, collateral, guarantees and other attached conditions, as mentioned in recital (281) below, indicated that they are not being entrusted or directed by the State. This party also submitted that the overlap in rates by private and publicly owned banks showed that the publicly owned banks were providing loans on market terms, not the opposite. The Commission also tried to shift the burden of proof by stating that its conclusions applied ‘[i]n the absence of any divergent information received from the private financial institutions’. However, the Commission should have first established a prima facie case.

• (274) In response to these claims, the Commission recalled that in the absence of cooperation from the banks, the Commission had to rely on facts available for the private banks. As such, it did not shift the burden of proof. Furthermore, since there was cooperation from only one State-owned bank, the Commission used the information from the cooperating party, which was deemed to be a public body, to compare it with the conditions offered by private banks, which were not cooperating. The fact that there was an overlap in rates shows that the private banks also provided loans below market terms, not the opposite. To follow the reasoning of the party would be equivalent to concluding that information based on facts available is more reliable than conclusions based on verified information. The fact that companies benefitted from different types of loans during the investigation period with different conditions attached to it, does not alter this. In any event, the party failed to put forward any evidence or argument to rebut the Commission's findings. These claims were thus rejected.

• (275) In addition, the normative framework applying to all banks in China is much wider than only the two regulations governing the CBIRC, as shown in recital (238) above, and the entire set of regulatory documents is legally binding, as explained in recital (244) above, so that they amount to more than acts of mere encouragement. Moreover, verification visits in the sampled companies did not reveal any significant differences between loan conditions or rates provided by the private financial institutions, and those provided by publicly owned financial institutions.

• (276) Following disclosure, the GOC submitted that the legislation invoked by the Commission has only guiding role, and a mere guiding role of the government is not sufficient for a finding of entrustment or direction to be made. In this context, the GOC highlighted that article 34 of the Bank Law was nothing more than a general statement without practical implications.

• (277) Article 15 of the General Rules on Loans is also not a mandatory obligation but merely allows financial institutions to take state policies into account. Decision No. 40 is also not a binding document, and it explicitly mandates financial institutions to provide financial support ‘according to the credit principles’.

• (278) The Commission disagreed with this view, since the normative framework applying to all banks in China is legally binding, as explained in recital (244) above, so that they amount to more than acts of mere encouragement or guidance by the government. Concerning Decision No. 40, the Commission already established in recital (247) above that Decision No. 40 instructs all financial institutions to provide credit support only to encouraged projects even though Article 17 of the same Decision also asks the bank to respect credit principles. The Commission thus maintained its position.

3.4.1.7.   Credit ratings

• (279) In previous anti-subsidy investigations, the Commission already determined that domestic credit ratings awarded to Chinese companies were not reliable, based on a study published by the International Monetary Fund ⁷³, showing a discrepancy between international and Chinese credit ratings, combined with the findings of the investigation concerning the sampled companies. Indeed, according to the IMF, over 90 % of Chinese bonds are rated AA to AAA by local rating agencies. This is not comparable to other markets, such as the EU or the US. For example, less than 2 % of firms enjoy such top-notch ratings in the US market. Chinese credit rating agencies are thus heavily skewed towards the highest end of the rating scale. They have very broad rating scales and tend to pool bonds with significantly different default risks into one broad rating category ⁷⁴.

• (280) In addition, foreign rating agencies, such as Standard and Poor’s and Moody’s, typically apply an uplift over the issuer’s baseline credit rating based on an estimate of the firm’s strategic importance to the Chinese Government and the strength of any implicit guarantee when they rate Chinese bonds issued overseas ⁷⁵. Fitch for example clearly indicates, where applicable, that such guarantees are a key driver underlying its credit ratings of Chinese companies ⁷⁶.

• (281) The Commission also found further information to complement this analysis. First, the Commission determined that the State can exercise a certain influence over the credit rating market. According to two studies published in 2016, there were around 12 credit rating agencies active on the Chinese market, a majority of which are State-owned. In total, 60 % of all rated corporate bonds in China had been rated by a State-owned ratings agency ⁷⁷.

• (282) The GOC confirmed that, during the investigation period, there were 15 credit rating agencies active on China's bond market, among which 12 domestic rating agencies, including Shanghai Brilliance Credit Rating & Investors Service Co., Ltd, Dagong Global Credit Rating Co., Ltd, Golden Credit Rating International Co., Ltd, China Bond Rating Co., Ltd, CSCI Pengyuan Credit Rating Co., Ltd, Fareast Credit Rating Co., Ltd, China Chengxin Securities Rating Co., Ltd, United Credit Ratings Co., Ltd, Shanghai Credit Information Services Co., Ltd, China Securities Index Co., Ltd, Beijing North Joint Credit Evaluation Co., Ltd and Sichuan Dapu Credit Rating Limited Company. Most of the domestic rating agencies were State-owned. There were also 3 Sino-foreign joint venture credit rating agencies, namely China Lianhe Credit Rating Co. Ltd, S&P Global China Rating, and China Chengxin International Credit Rating Co., Ltd.

• (283) Second, there is no free entrance on the Chinese credit rating market. It is essentially a closed market, since rating agencies need to be approved by the China Securities Regulatory Commission (‘CSRC’) or the PBOC before they can start operations ⁷⁸. The PBOC announced mid-2017 that overseas credit rating agencies would be allowed to carry out credit ratings on part of the domestic bond market, under certain conditions. However, during the investigation period, no foreign credit rating agency had been admitted yet ⁷⁹. Nevertheless, in the meantime, foreign agencies did establish joint ventures with some local credit rating agencies, which provide credit ratings for domestic bond issues. However, these ratings follow Chinese rating scales and are thus not exactly comparable with international ratings, as explained above.

• (284) Finally, a recent study performed by the PBOC itself confirms the Commission’s findings, stating in its conclusions that ‘if the investment level of foreign bonds is set to international rating BBB-and above, then the domestic bond investment grade may be rated at AA-level and above, taking into account the difference between the average domestic rating and the international rating of 6 or more notches’ ⁸⁰.

• (285) In view of the situation described in recitals (279) to (284) above, the Commission concluded that Chinese credit ratings do not provide a reliable estimation of the credit risk of the underlying asset. On this basis, even if some sampled companies were awarded a good credit rating by a Chinese rating agency, the Commission concluded that such ratings are not reliable. Those ratings were also distorted by the policy objectives to encourage key strategic industries, like GFF.

3.4.2.   Preferential financing: loans

3.4.2.1.   Revolving loans

• (286) In line with the findings in the HRF and tyres investigations ⁸¹, revolving loans are loans, which allow a company to replace the capital repaid on loans at the maturity date by fresh capital from new loans. Revolving loans are usually a sign of short-term liquidity problems of the borrower, and involve a greater risk exposure for the banks granting them. The existence of revolving loans in a given company was therefore considered an indication that the company is in a worse financial situation than what the financial statements would suggest at first sight, and that there is an additional risk related to short-term liquidity problems.

• (287) Following definitive disclosure, the GOC claimed that revolving loans are not necessarily a sign of liquidity issues. This is clear from the websites of leading European banks. For instance, revolving credit lines and loans are a part of the standard business of banks such as ING ⁸² and BNP Paribas ⁸³ and are not associated with higher interest rates.

• (288) The Commission disagreed with the assessment made by the GOC. 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 ⁸⁴. 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.

• (289) Revolving credit facilities do indeed exist in Europe, 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, such credit facilities entail an additional cost, be it a contractual margin on top of the usual short-term market rates ⁸⁵, 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.

• (290) 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 labelled 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, sometimes the purpose of the loan referred to ‘repayment of loans’. In addition, 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.

3.4.2.2.   Financing with the aim to restructure long-term debt

• (291) In the course of the investigation, the Commission found that certain sampled companies issued bonds with the specific purpose of debt repayments, namely loans. The Commission established that by restructuring their debt via this instrument, some companies could rearrange and defer their liabilities, as well as, obtain the funds without which they would not be able to meet their repayment obligations, evidencing therefore problems to raise funds.

• (292) The use of bonds to that aim raises concerns on the ability of a given company to pay for its debts, therefore questioning not only its short-term liquidity, but also the solvency in the long term. The existence of bonds issued with the purpose of repayment of loans in a given company is therefore considered an indication that the company is in a worse financial situation than what the financial statements would suggest at first sight, and that there is an additional risk related to its short and long-term financing.

3.4.2.3.   Specificity

• (293) As demonstrated in recitals (238) to (245), several legal documents, which specifically target companies in the sector, direct the financial institutions to provide loans at preferential rates to the GFF industry. These documents demonstrate that the financial institutions only provide preferential lending to a limited number of industries/companies, which comply with the relevant policies of the GOC.

• (294) Following definitive disclosure, the GOC disputed the specificity conclusions on preferential lending. According to the GOC, Articles 4 and 34 of the Bank law merely set out general guidelines with respect to the conduct of commercial banks and do not mention to which companies or industries loans should be granted. Furthermore, Article 15 of the General Rules on Loans does not expressly and unambiguously restrict the availability of this specific subsidy to companies in the GFF sector. Decision No. 40 is not specific to an enterprise or industry but to certain encouraged projects, which is not synonymous. Moreover, Decision No. 40 is not mandatory, and in light of the extremely wide array of economic sectors and industries covered by Decision No. 40, it cannot be concluded that this documents explicitly limits the access of the alleged subsidy to certain enterprises.

• (295) In this respect, the Commission noted that, even though the Bank law and the General Rules on Loans do not specify GFF as such, they do refer to the State’s industrial policies, which are set out in the documents listed in Section 3.1 above. The Commission thus referred back to the documents that were listed and the conclusions that were reached in Section 3.1 above. In addition, it considered that references to the GFF industry are sufficiently clear as this industry is identified either by its name or by a reference to the product that it manufactures or the industry group that it belongs to. Moreover, the fact that the GOC supports a limited group of encouraged industries, which includes the GFF industry, makes this subsidy specific. The Commission thus maintained its conclusions.

• (296) 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.

3.4.2.4.   Benefit and calculation of the subsidy amount

• (297) The Commission then calculated the amount of the countervailable subsidy. For this calculation, it assessed the benefit conferred on the recipients during the investigation period. According to Article 6(b) of the basic Regulation, the benefit conferred on the recipients is the difference between the amount of interest that the company pays on the preferential loan and the amount that the company would pay for a comparable commercial loan obtainable on the market.

• (298) In this regard, the Commission noted a number of specificities on the Chinese GFF market. As explained in Sections 3.4.1.1 to 3.4.1.7 above, the loans provided by Chinese financial institutions reflect substantial government intervention and do not reflect rates that would normally be found in a functioning market.

• (299) The sampled groups of companies differ in terms of their general financial situation. Each of them benefitted from different types of loans or financial leasing 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.

• (300) The Commission assessed individually the financial situation of each sampled group of exporting producers in order to reflect these particularities. In this respect, the Commission followed the calculation methodology for preferential lending established in the anti-subsidy investigation on hot rolled flat steel products originating in the PRC, as well as in the anti-subsidy investigation on tyres originating in the PRC ⁸⁶ and explained in the recitals below. 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.

(a) CNBM Group

• (301) As mentioned in recitals (250) to (252) above, the Chinese lending financial institutions did not provide any creditworthiness assessment. Hence, in order to establish the benefit, the Commission had to assess whether the interest rates for the loans accorded to the CNBM Group were at market level.

• (302) The exporting producers of the CNBM Group presented themselves in a generally profitable financial situation according to their own financial accounts. One of the exporting producers did not have any loans. However, the Commission noted that it financed 65 % of its purchases by a sort of preferential short-term financial instrument (bank acceptance drafts). As explained in Section 3.4.3.2 below, bank acceptance drafts are a type of debt instrument; therefore, their extensive use points to short-term liquidity issues. The second exporting producer made constant profits during the period 2016-2018, and had healthy financial indicators at first sight, such as a low debt-to-assets ratio. However, it appeared to have short-term liquidity problems for the following reasons: the company’s outstanding short-term debt represented almost 100 % of its turnover; it issued a bond to repay bank loans; it used a high amount of bank acceptance drafts to finance its purchases, and it used revolving loans, which suggests that the company may be in a more fragile financial situation than what the financial statements would suggest at first sight. The third exporting producer showed a similar picture, with a profitable situation, but an extensive use of bank acceptance drafts and a bond issued to repay bank loans.

• (303) The first intermediate parent company, China Jushi, was profitable during the period 2016-2017 and the investigation period, but used bank acceptance drafts extensively to finance its purchases. Furthermore, the Commission established that some of the loans provided at the level of China Jushi were revolving loans, and that China Jushi had issued two bonds with the purpose of repaying bank loans. Revolving loans were also found in the second intermediate parent company, Sinoma Technology.

• (304) As mentioned in recitals (207) to (217) above, the parent company CNBM did not cooperate. However, looking at its publicly available annual report for 2018, a similar picture emerges: the company has a high leverage, with a net debt ratio of 130 %, and a debt-to-assets ratio of 68 %. During the investigation period, the company concluded a debt-to-equity swap deal with State-owned banks, in order to improve its debt structure. Under such a deal, the company could convert part of its debt to State-owned banks into shares, and thus reduce the liabilities on its balance sheet.

• (305) The Commission noted that the various companies in the CNBM Group were awarded ratings ranging between AA- and AA+ by a Chinese credit rating agency. In light of the overall distortions of Chinese credit ratings mentioned in recitals (279) to (285), the Commission concluded that this rating is not reliable.

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

• (307) After definitive disclosure, the CNBM Group claimed that the Commission gave a joint credit rating to the entire CNBM Group based mainly on CNBM’s credit rating, even though the level of indebtedness of CNBM could not have a detrimental effect on China Jushi, for which it holds only a 27 % stake. In addition, CNBM could not transfer its debt liabilities to China Jushi since the companies in the group are separate legal entities with limited liability, meaning that the debts of shareholders or subsidiaries could not be transferred. Furthermore, since the CNBM Group considers that bank acceptance drafts are not equivalent to short-term loans they should also not be taken into account for the assessment of the companies’ credit rating.

• (308) The Commission disagreed with these statements. As shown in recitals (301) to (304) above, the Commission has made an individual assessment of each of the companies within these groups. In the specific case of the CNBM Group, irrespective of the situation described at the level of CNBM, most of the companies reviewed showed a similar picture, including revolving loans, extensive use of bank acceptances, and bonds taken out to repay loans. In addition, contrary to what was stated by the company, debt was actually transferred between various companies in the group through intercompany loans. Therefore, the Commission decided to attribute a single credit rating to the group. Finally, as mentioned in Section 3.4.3.2 below, the Commission considered bank acceptance drafts as another type of financial instrument equivalent to a short-term loan, which can thus be used in the determination of the credit ratings. Hence, the company’s claims were rejected.

• (309) The premium expected on bonds issued by firms with this rating (BB) was then applied to the standard lending rate of the PBOC in order to determine the market rate.

• (310) That mark-up was determined by calculating the relative spread between the indices of US AA rated corporate bonds to US BB rated corporate bonds based on Bloomberg data for industrial segments. The relative spread thus calculated was then added to the benchmark interest rates as published by the PBOC at the date when the loan was granted ⁸⁷, and for the same duration as the loan in question. This was done individually for each loan provided to the company.

• (311) Following definitive disclosure, several parties claimed that the use of a relative spread was flawed. All of them alleged that the Commission should have used an absolute instead of a relative spread between the US AA rated bonds and the US BB rated bonds. The following reasons were provided:

• (1) The level of the relative spread fluctuates with the level of the base interest rate in the US: the lower the interest rate level is, the higher the resulting mark-up will be.

• (2) The level of the resulting benchmark fluctuates according to the level of the PBOC benchmark rate to which it is applied. The higher the PBOC benchmark rate, the higher the resulting benchmark will be.

• (3) The absolute spread remains roughly stable over time, whereas the relative spread shows great variations.

• (312) These issues were already presented in previous investigation ⁸⁸. As can be seen from recitals (175) to (187) in the HRF case, and from recital (256) in the Tyres case, the Commission rejected these arguments on the following grounds.

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

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

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

• (316) On the third point, historical data showing the evolution of the absolute and relative spread over time were already analysed in the Tyres case. The Commission’s analysis found that the absolute spread is not as stable as alleged, but instead varies over time, from 1 % to 4,5 %. In addition, the relative spread followed 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 were similar — the difference between the highest and the lowest figures was 530 % for the relative spread and 450 % for the absolute spread ⁸⁹.

• (317) The GOC also objected to the use of an out-of-country benchmark as such. In this respect, the GOC noted that the Commission first should have looked for comparable commercial loans the exporting producers could actually obtain on the market. Otherwise, the benchmark should be based on positive evidence and reasoned explanations that all loans in the market concerned were distorted by government intervention such that no comparable loan existed on the domestic market.

• (318) In this respect, as explained in Section 3.4.1.7 above, the Commission determined that domestic credit ratings awarded to Chinese companies were not reliable as such, and were also distorted by the policy objectives to encourage key strategic industries, like GFF. As a result, Chinese credit ratings do not provide a reliable estimation of the credit risk of the underlying asset, and the Commission had to look for a benchmark based on undistorted credit ratings. Furthermore, the Commission noted that the resulting interest rate of around 9 % for BB rated companies is not unreasonable in view of the fact that the yield of BB rated corporate bonds on the Chinese domestic market was 21 % at the end of the investigation period ⁹⁰. Consequently, these claims were rejected.

• (319) The GOC also claimed that the use of an out-of-country benchmark was inappropriate, as the benchmark did not make the necessary adjustments to reflect the prevailing conditions on the Chinese financial market, and that the Commission failed to take into account differences that existed in the size of the loans, the repayment terms and conditions and whether or not the loans were guaranteed, among other factors.

• (320) The Commission disagreed with this view, since the PBOC benchmark rate is used as a starting point for the calculation. Furthermore, the use of the relative spread captures changes in the underlying country-specific market conditions, which are not expressed when following the logic of an absolute spread, as explained in the recital above. In addition, the Commission observed that it it not possible to include all factors of the individual risk assessment of a bank into the proxy. However, the Commission’s calculation methodology takes into account parameters of individual loans, such as the start date and the duration of the loan, as well as the variability of the interest rate. The GOC’s claims were thus rejected.

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

• (322) Furthermore, as explained in Section 3.4.2.1, the existence of revolving loans in a given company is considered an indication that the company is in a worse financial situation than what the financial statements would suggest at first sight, and that there is an additional risk related to short-term liquidity problems. Indeed, revolving loans are usually concluded for short durations. It is highly unlikely that a revolving loan would have a maturity of more than two years, and the evidence of the loans verified in the sampled companies supported this conclusion.

• (323) Therefore, in order to take into account the increased risk exposure of the banks when providing short-term financing to companies with revolving loans, the Commission moved down one notch in the risk rating scale and adapted the relative spread calculation for all short-term financing of the concerned companies. The Commission thus made a comparison between US AA corporate bonds and US B (instead of BB) corporate bonds with the same duration. According to Standard & Poor's credit rating definitions, an obligor rated ‘B’ is more vulnerable than the obligors rated ‘BB’, but the obligor currently still has the capacity to meet its financial commitments. Nevertheless, adverse business, financial, or economic conditions may impair the obligor's capacity or willingness to meet its financial commitments. This benchmark is therefore considered to be appropriate to reflect the additional risk derived from the use of revolving loans as short-term financing.

• (324) The Commission thus used this as the relevant benchmark for all short-term debt, including loans, with a maturity of 2 years or less provided to companies, which were making use of revolving loans.

• (325) For the remaining loans with a maturity above 2 years and for companies that did not have revolving loans, the Commission reverted to the general benchmark awarding the highest grade of ‘Non-investment grade’ bonds, as explained in recital (306).

• (326) The Commission found that certain companies within the group issued bonds with the purpose of debt restructuring. In this case, as explained in Section 3.4.2.2, the Commission considered that the companies concerned are in a worse financial situation than what are the financial statements would suggest at first sight, and that there is an additional risk related to its short and long-term financing. Therefore in order to take into account the increased risk exposure, the Commission moved down one notch in the risk rating scale and adapted the relative spread calculation also for their long-term financing, including loans, by making a comparison between US AA corporate bonds and US B.

• (327) Finally, since the parent company CNBM did not cooperate, the benefit for preferential lending at the level of CNBM was established by using the methodology explained in this section, applied to the publicly available information in the 2018 annual report of this company, such as outstanding liabilities, average cost of capital and average duration of borrowings.

(b) Yuntianhua Group

• (328) As mentioned in recitals (250) to (252) above, the Chinese lending financial institutions did not provide any creditworthiness assessment. Hence, in order to establish the benefit, the Commission had to assess whether the interest rates for the loans accorded to the Yuntianhua Group were at market level.

• (329) The exporting producers of the Yuntianhua Group presented itself in a generally profitable financial situation according to its own financial accounts.

• (330) However, the analysis of the short-term liquidity raises concerns for the two exporting companies since the short-term debts in the IP represent from 90 to over 100 percent of the companies turnover, with an increasing trend from previous year. The use of short-term debt is significant in both companies. Although one of the exporting producers has no loans during the IP, it financed most of its purchases, as well as part of other non-operative cost, through bank acceptance drafts, an instrument with a maturity, generally, lower than a year.

• (331) CPIC, the first direct shareholder and key supplier for the exporting producers, was profitable during the IP. However, it decreased the return to equity from previous year. Furthermore, the company presents liquidity issues, since its short term debts represent 80 to 90 % of the total debt. The comparison of the company’s current assets to its current liabilities provides a current ratio ⁹¹ with a low value, below 1, which raises concerns on its capacity to repay short-term debts. Similarly, the Commission established the extensive use of bank acceptance drafts to finance its purchases.

• (332) Yunnan Yuntianhua Group Co., Ltd., the parent company of the Yuntianhua Group, involved in the supply chain of the product under investigation, was loss-making during the IP. The comparison of the company’s current assets to its current liabilities, through the current ratio below 1, raises serious concerns on its liquidity and its ability to repay short terms debts. Furthermore, the investigation revealed that the company issued bonds with the explicit purpose of debt repayment. The use of revolving loans was similarly established.

• (333) The Commission noted that the Yuntianhua Group was awarded an AA rating by a Chinese credit rating agency. In light of the overall distortions of Chinese credit ratings mentioned in recitals (279) to (285) above, the Commission concluded that this rating is not reliable.

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

• (335) The premium expected on bonds issued by firms with this rating (BB) was then applied to the standard lending rate of the PBOC in order to determine the market rate.

• (336) That mark-up was determined by calculating the relative spread between the indices of US AA rated corporate bonds to US BB rated corporate bonds based on Bloomberg data for industrial segments. The relative spread thus calculated was then added to the benchmark interest rates as published by the PBOC at the date when the loan was granted ⁹², and for the same duration as the loan in question. This was done individually for each loan and financial leasing provided to the company.

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

• (338) Furthermore, as explained in Section 3.4.2.1, the existence of revolving loans in a given company is considered an indication that the company is in a worse financial situation than what the financial statements would suggest at first sight, and that there is an additional risk related to short-term liquidity problems. Indeed, revolving loans are usually concluded for short durations. It is highly unlikely that a revolving loan would have a maturity of more than two years, and the evidence of the loans verified in the sampled companies supported this conclusion.

• (339) Therefore, in order to take into account the increased risk exposure of the banks when providing short-term financing to companies with revolving loans, the Commission moved down one notch in the risk rating scale and adapted the relative spread calculation for all short-term financing of the concerned companies. The Commission thus made a comparison between US AA corporate bonds and US B (instead of BB) corporate bonds with the same duration. According to Standard & Poor's credit rating definitions, an obligor rated ‘B’ is more vulnerable than the obligors rated ‘BB’, but the obligor currently still has the capacity to meet its financial commitments. Nevertheless, adverse business, financial, or economic conditions may impair the obligor's capacity or willingness to meet its financial commitments. This benchmark is therefore considered appropriate to reflect the additional risk derived from the use of revolving loans as short-term financing.

• (340) The Commission thus used this as the relevant benchmark for all short-term debt, including loans, with a maturity of 2 years or less provided to companies, which were making use of revolving loans.

• (341) For the remaining loans with a maturity above 2 years and for companies that did not have revolving loans, the Commission reverted to the general benchmark awarding the highest grade of ‘Non-investment grade’ bonds, as explained in recital (306).

• (342) The Commission found that certain companies within the group issued bonds with the purpose of debt restructuring. In this case, as explained in Section 3.4.2.2, the Commission considered that the companies concerned are in a worse financial situation than what are the financial statements would suggest at first sight, and that there is an additional risk related to its short and long-term financing. Therefore in order to take into account the increased risk exposure, the Commission moved down one notch in the risk rating scale and adapted the relative spread calculation also for their long-term financing, including loans, by making a comparison between US AA corporate bonds and US B.

3.4.2.5.   Conclusion on preferential financing: loans

• (343) The investigation showed that all sampled groups of exporting producers benefited from preferential lending during the investigation period. In view of the existence of a financial contribution, a benefit to the exporting producers and specificity, the Commission considered preferential lending a countervailable subsidy.

• (344) The subsidy amount established with regard to the preferential lending during the investigation period for the sampled groups of companies amounts to:

Preferential financing: lending

3.4.3.   Preferential financing: other types of financing

3.4.3.1.   Credit lines

• (345) The investigation showed that Chinese financial institutions also provided credit lines at preferential conditions in connection with the provision of financing to each of the sampled companies. These consisted of framework agreements, under which the bank allows the sampled companies to use various debt instruments, such as working capital loans, bank acceptance drafts, documentary bills, other forms of trade financing, etc., within a certain maximum amount.

• (346) The purpose of a credit line is to establish a borrowing limit that the company can use at any time to finance its current operations thus making working capital financing flexible and immediately available when needed. The investigation showed that the two sampled exporting producers had credit line agreements with different banks that covered diverse short-term financing instruments with the purpose to finance operating expenses. Consequently, the Commission considered that in principle, all short-term financing of the sampled companies should be covered by a sort of credit line instrument, including bank acceptance drafts, which are issued on a regular basis to finance current operations.

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

• (348) Under normal market circumstances, credit lines would be subject to a so-called ‘arrangement’ or ‘commitment’ fee to compensate for the bank's costs and risks at the opening of a credit line, as well as to a renewal fee charged on a yearly basis for renewing the validity of the credit lines. However, the Commission found that all of the sampled companies benefited from credit lines provided free of charge.

• (349) Following definitive disclosure, the GOC argued that the Commission’s claim that in normal market circumstances, credit lines are subject to commitment fees was unjustified in light of its own consideration in the Aircraft cases. According to the GOC, commitment fees only apply when the credit line is a committed credit line. However, the Commission did not establish that the credit lines in question were committed credit lines. The GOC recalled that in ‘EC – Aircraft’, the EU itself contended that the fact that the EIB did not charge commitment fees was justified because ‘… (i) for “openrate” contracts (i.e. contracts where the rates are not fixed ex ante), there is no certainty as to the timing of the availability of funds, and the EIB does not commit to a precise interest rate’.

• (350) In response to this claim, the Commission noted that the argument of the EU in EC-Aircraft proceedings regarding commitment fees was not followed by the Panel in its ultimate findings. In particular, the Panel established that the lack of charging commitment fees by the EIB to compensate for the the EIB’s commitment to make funding available was more advantageous than a comparable loan from a commercial lender and conferred a benefit ⁹³. Therefore, this claim was rejected.

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

• (352) Following disclosure, several parties claimed that the Commission did not perform a specificity analysis for credit lines. Furthermore, the GOC reiterated its comments developed in Section 3.1 above, stating that GFF is not an encouraged industry and none of the documents referred to by the Commission in this regard show that the credit lines provided to the GFF industry are specific within the meaning of Article 2 of the SCM Agreement.

• (353) The Commission did not make a separate specificity analysis as credit lines are intrinsically linked to other types of preferential lending such as loans, and thus follow the same specificity analysis as developed in Section 3.4.2.3 above for the loans. As a result, these claims were rejected.

• (354) The appropriate benchmark for the arrangement fee was established at 1,5 % by reference to publicly available data ⁹⁴ for opening similar credit lines in similar (but undistorted) situations. The amount of the arrangement fee is payable on a lump sum basis at the time of the opening of the credit line. Therefore, the Commission applied the benchmark to the amount of credit lines opened during the investigation period.

• (355) For credit lines existing before the beginning of the IP and renewed during the IP, a renewal fee of 1,25 % was used as a benchmark following the same source. The amount of the renewal fee is payable yearly on a lump sum basis at the time of the renewal of the credit line. Therefore, the Commission applied the benchmark to the amount of credit lines renewed during the IP.

• (356) After definitive disclosure, one of the parties commented that the costs pertaining to arrangement and renewal fees are commonly waived by banks in order to secure large commercial clients. The company further provided an example of a bank in the United States, which did not charge an arrangement fee and only charged a 0,25 % annual renewal fee for a committed credit line of between USD 100 001 and USD 3 million ⁹⁵ In addition, given that the United States is a much larger market than the United Kingdom and that the Commission relied on bond ratings from the United States to establish creditworthiness, such a benchmark was considered to be much more suitable than the UK benchmark for small businesses used by the Commission.

• (357) The Commission noted that the allegation that the costs pertaining to arrangement and renewal fees are commonly waived by banks in order to secure large commercial clients was not substantiated by any evidence. Moreover, the Commission reviewed the benchmark proposed by the company and found that this benchmark specifically concerned lines of credit for small businesses with a maximum amount of USD 3 million, and more particularly related to short term working capital needs. On the contrary, the benchmark used by the Commission had a minimum limit of GBP 25 000 but no upper limit, there were no limitations in terms of the use of the capital provided or the duration, and it was separate from another financial product mentioned in the same document, but specifically tailored to small businesses. The Commission’s own benchmark was thus more suitable for large size clients. In addition, the US bank providing the credit lines in the example chosen by the claimant was a bank operating exclusively on the US market, whereas HSBC (the benchmark used by the Commission) is a global bank, operating also on the Chinese market. There is no evidence available to the Commission indicating that HSBC waives the fees depending on the size of the customer. In this respect as well, the Commission’s benchmark thus seemed more appropriate. Consequently, the company’s claims were rejected.

3.4.3.2.   Bank acceptance drafts

(a) General

• (358) Bank acceptance drafts are a financial product aimed at developing a more active domestic money market by broadening credit facilities. It is a form of short-term financing that might ‘reduce fund cost and enhance capital efficiency’ of the drawer ⁹⁶.

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

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

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

• (362) The Commission established that generally bank acceptance drafts are issued within the framework of a bank acceptance draft agreement specifying the identity of the bank, suppliers and buyer, the obligations of the bank and the buyer and detailing the value per supplier, the payment due date agreed with the supplier and the maturity date of the bank acceptance draft.

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

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

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

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

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

• — wait until maturity to be paid in cash the full amount of the face value of the draft by the accepting bank;

• — endorse the bank acceptance draft, i.e. use it as a means of payment for its liabilities towards other parties; or

• — discount the bank acceptance draft with the accepting bank or another bank and obtain the cash proceeds against the payment of a discounting rate.