Subsidies to Chinese Industry: State Capitalism, Business Strategy, and Trade Policy
Usha C.V. Haley
How did China move so swiftly in capital-intensive industries without labor-cost or scale advantage from bit player to the largest manufacturer and exporter in the world? This book argues that subsidies contributed significantly to China's success. Industrial subsidies in key Chinese manufacturing industries may exceed thirty percent of industrial output. Economic theories have mostly portrayed subsidies as distortive, inefficiently reallocating resources according to non-market criteria. However, China's state-capitalist regime uses subsidies to promote the governments' and the Communist Party of China's interests. Rather than aberrations, subsidies help Chinese businesses and governments produce, stabilize and create common understandings of markets; the flows of capital reflect struggles between critical Chinese actors including central and provincial governments. Concepts of state capitalism including market-transition theory, the multi-organizational Chinese state, and state as paramount shareholder, create complex and relevant understandings of Chinese subsidies. The authors develop independent measures of industrial subsidies using publicly-reported data at firm and industry levels from governmental and private sources. Subsidies include free to low-cost loans, subsidies to energy (coal, electricity, natural gas, heavy oil) and to key inputs, land and technology. Four sequential studies identify the growth of subsidies to Chinese manufacturing over time and effects on world industry: steel (2000-2007), glass (2004-2008), paper (2002-2009) and auto parts (2001-2011). Subsidies to Chinese industry affect and are affected by business strategy and trade policy. Business strategies include lobbying for subsidies and for protection from subsidized foreign competitors and managing supply chains to guard against whiplash effects of uncoordinated subsidies. The subsidized solar industry highlights how global business strategies and decisions on production location and technology development respond to production or consumption subsidies and include market (competitive) and non-market (political) strategies. The book also covers government policies and regulation on subsidies broadly focusing on domestic consumption (antidumping and countervailing duties) and domestic production (indigenous innovation).
SOEs’ habits of secrecy also obscure many key metrics. While the National Development Reform Commission (NDRC), the country’s top economic-planning agency, sets price guidelines, the actual costs and subsidies vary greatly across China since local regulators influence the prices. In a recent white paper, the Information Office of the State Council (2007) admitted that “China’s energy market system is yet to be completed, as the energy pricing mechanism fails to fully reflect the scarcity of
subsidies (Alis)—Paper industry where: Alis = Total loan-interest subsidies paid to Chinese paper industry from 2002 to 200917 Co = Reported loan-interest subsidies Yr = The number of years over which the loan-interest subsidies are projected to be paid 3. Subsidies reported in 73 companies’ annual reports, CSap—Auto-parts industry where: CSap = Total subsidies reported in auto-parts companies’ annual reports from 2001 to 2009 SIi = Subsidies reported as subsidy income in auto-parts
Securities; authors’ estimates. Exports In 2007, China already commanded a share of 20.7 percent of global steel exports, making it by far the largest exporter of steel in the world. Previous research has shown a relationship between China’s exports and subsidies to SOEs (Girma et al. 2007). Other research has shown that a large portion of the subsidies to steel have come from local and provincial governments to enhance regional exports (Eckaus 2006; Taube and in der Heiden 2009). China’s
China, ICBC, Bank of China, China Construction Bank, Bank of Communications, Citic, and Minsheng Bank.5 Furthermore, since midstream products trade in international markets, firms may pursue nonmarket strategies toward maintaining open markets for their products. Since many midstream firms attempt to differentiate through product innovation, they also may favor production-assistance policies that subsidize R&D as well as protect IP. In the supply chain, downstream firms have the least direct
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