How does the Chinese government’s support for companies impact their productivity, and how can it be compared to other major economies?
A new report, “The Red Ink: Estimating Chinese Industrial Policy Spending in Comparative Perspective,” attempts to quantify the size of total industrial policy spending by China and compares it to seven other economies (the United States, Japan, South Korea, Taiwan, Germany, France and Brazil). A May 24 discussion on the report was hosted by the Center for Strategic and International Studies Economics program and moderated by the CSIS Trustee Chair in Chinese Business and Economics Scott Kennedy, who is also a co-author and editor of the report.
The U.S. State Department provided “generous funding” for the report, according to CSIS.
One of the co-authors of the report, Center for Strategic and International Studies Economics Program Senior Fellow Gerard DiPippo, said China spends much more than other countries on direct subsidies to firms, especially state-owned enterprises (SOEs).
“So no matter how you how you split it, China spends way more than these economies on its industrial policy,” DiPippo said. “What is the one factor in a sort of Chinese political economy or toolkit that makes it special? I would say it's the state ownership of the financial sector. That's a really key difference because it allows the Chinese government and localities to allocate financial resources in a way that other economies, at least in our sample, cannot duplicate.”
DiPippo and another co-author, Trustee Chair Fellow Ilaria Mazzocco, were joined by Réka Juhász of Columbia University, Jehan Sauvage of the Organization for Economic Co-operation and Development (OECD), and Yao Yang, dean and professor at Peking University.
“The heart of the report is the careful calculation of total industrial policy spending by China and the other economies, combining estimates from multiple tools, among them direct subsidies, tax breaks, below-market credit and state investment funds," a CSIS overview of the report states.
“The report provides additional context by examining the historical trajectory of industrial policy of these economies and the evolution of industrial policy across these economies for three industries — aluminum, semiconductors and electric vehicles. The historical and sectoral analyses point to some similarities across economies, but they also demonstrate how distinctive China has been in terms of both quantifiable spending and non-quantifiable policy tools."
Mazzocco said it was a daunting project.
“... Chinese industrial policy is really large by any standards you look at it,” she said. “If you look at it from a dollar, a market rate, that's $248 billion. And by comparison, to put that into perspective, the thinktank SIPRI estimates that China's total defense spending in 2019 was $240 billion. So that tells you something. Or from a look at purchasing power parity exchange rates at $406 billion. When you compare that with other countries, it's clear whether you're looking at percentage of GDP or dollars, it's still far larger than any other country."
She said there are several ways the government can support industry, including direct subsidies, tax incentives, specifically targeting research and development, targeted types of taxes and energy subsidies for manufacturing.
“Below-market credit, which it turns out is extremely important in China, and state investment councils,” Mazzocco said. “An example of that is the government guidance funds. But there are other examples in other countries as well, upstate equity investments in domestic firms.
"And then we found several transpacific factors for which we struggled to find an equivalent in our countries. So the most important one of those, I would say, is the below-market land sales, which it really is derived from the fact that land is publicly owned in China. The state owns all land.”
DiPippo said the researchers plotted their estimate of Chinese industrial policy planning from 2017-19 as a share of China's GDP in those respective years. They did not use data from 2020, since the COVID-19 pandemic had a tremendous impact on economics, as well as everything else.
“What will probably jump out to you is that the total level doesn't change very much," he said. "Most of the variance is actually in the below-market land sales. Those fluctuate in part with demand and purchase prices. But in general, if you look at the other stacks in the bar chart, you'll see that they're actually pretty steady as a share of GDP."
DiPippo said Chinese firms that are listed on the stock exchanges report subsidies in their filings, total subsidies that allowed them to estimate how much is going to unlisted state-owned enterprises.
“The true level of subsidies going to private firms is certainly higher. You don't know how much higher, but it is higher. Another thing to flag is the tax incentives in the case of China. It's technically tax rebates and fee rebates."
Most state-affiliated credit for policy goals actually goes to the commercial banking sector, DiPippo said.
"China's spending as a share of GDP is much higher than any of the other economies in our sample,” DiPippo said.
Yang offered high praise for the work.
“This is a great report because this is the first time to quantify China's industrial policy and also puts China in international comparison,” he said. “So, when we talk about the industrial policy, we always think about the specific sectors. That's going to be very difficult for us to do international comparison. And also, we have not been able to come up with idea about the whole big industrial policy in a specific country. But we know that China conducts a lot of industrial policy and we really don't know the size of it.”
Yang said he would “love” to see a Chinese think tank undertake such a study.
He said it was important to note that SOEs, in purely economic terms, are more reliable.
“They pay back more regularly than those small private companies. And so there is a kind of a size advantage on the side of SOEs,” Yang said. “And so they get a lower interest rate. That counts for one quarter of the total amount of subsidies.”
“In China's case, the state owns almost the entire financial sector. And there's plenty of evidence that there is sort of peripheral preferential and policy oriented lending policies go to the commercial banking sector so you just can't duplicate the methods,” DiPippo said.
Yang said he did not believe this report would be used by the USA to scale up the sanctions on China. But it does point to a concern that if China continues to heavily invest in subsidies, the United States and Europe will follow suit.
“Is this report a green light for Washington, D.C., to use a big stick on China?” Kennedy asked. “Or should we, you know, set some kind of cap for countries across the world and say, going above X percent of GDP in industrial policy spending is something we should avoid? We note that in 2010, the G-20 in their meeting in Seoul that year tried to negotiate a cap for current account surpluses around 3 or 4%.”
“And then we have also need to think about the other side. That is when a country spends on highly industrial policy that creates a new technology, a new launch that can have positive effects,” Yang said. “And in some specific areas like in climate change rate that just to mention China investment into sort of powering into alternative energy and also EAS and eventually are going to benefit the whole world. China actually creates that huge amount of technologies."
“Our project is fairly neutral on making value judgments over industrial policy. We're really just trying to quantify data, I think is our key innovation here,” DiPippo said. “But I think that is a necessary part of having a discussion of what is even going on. How big is it? Then you also have to discuss, OK, given these specific tools or goals, how we want to parse it, how do you want to handle that? And I think at a minimum, it's something that the US, with its allies discuss ideally would have a much larger global conversation about that.”
Kennedy asked why countries are so hesitant to be transparent about their spending.
“Why not brag and show off how all that spending is being effective and really try to reshape the conversation. The WTO generally looks at industrial policy spending as mostly bad and needs to be limited, except in certain circumstances,” he said. “We're going to run into a problem, I think, even meeting the most minimum policy suggestions of this report, which is transparency. Now, the EU does require its members to report to the European Commission on state aid. Why do you think countries are so hesitant to report more fully on their industrial policy spending? Is there anything, any incentives that we can provide, to get them to want to make it so that we don't have to struggle for months on end to do this work?
Juhász said in recent years, the broad consensus in academia and among policymakers, was that industrial policy should be curtailed. That might explain why data is often hidden.
“And what's even more problematic, countries are going to try to do this in a way that becomes increasingly hard to detect. We move away from tariffs to subsidies to subsidized loans to informal guidance,” she said.
"So I think, there is kind of an incentive here as well that if we acknowledge the reality on the ground and if we acknowledge that we are in a world where market failures are going to create a need for industrial policy, from development to climate change to other issues, I think that will also create a much more sort of constructive environment where countries are willing, more willing to disclose what they're doing, and they're going to be less willing to try and hide this in increasingly more difficult ways to detect.”
Kennedy also sounded a note of caution.
“I am quite concerned that we are in a potential race to the bottom and one in which countries will get less transparent, not more transparent,” he said at the forum’s conclusion. “And so that is a challenge, and particularly when a lot of the research shows that although there are lots of successful cases, there's also, more often than not, failures of industrial policy spending. And while some countries have the ability, like a venture capitalist, to rack up losses with a couple of successes, most countries don't. Most countries don't have the ability to adjust to lose a lot of money. They don't have the systems in place to spend effectively.
“And so as we're trying to figure out what types of disciplines that we put on subsidies and various kinds of industrial policy spending, we're going to need to think more effectively about what is more likely to generate the good outcomes than the worse outcomes if we're going to go down this road much further.”