Subsidies to Chinese Industry: State Capitalism, Business Strategy, and Trade Policy

Subsidies to Chinese Industry: State Capitalism, Business Strategy, and Trade Policy

Usha C.V. Haley

Language: English

Pages: 272

ISBN: 0199773742

Format: PDF / Kindle (mobi) / ePub


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).

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independent research. Bankers’ acceptances consist of promises of future payment by banks’ customers made from deposits at the banks and that the banks guarantee. This form of financing surged to RMB 2.3 trillion in 2010, 10 times the average of RMB 224 billion per year from 2003 to 2009. For designated or entrusted loans, nonfinancial companies lend money directly to each other, with banks acting as intermediaries. The banks earn fees for these transactions, but the loans stay off their books.

tonne of cold-rolled steel in each year WCRSPi = World costs per tonne of cold-rolled steel in each year Technology Subsidies 15. Government tech-policy subsidies TPSap (general formula)—auto-parts industry where: TPSap = Total reported government technology and production enhancement grants for auto-parts industry TPSACi = Technology and production enhancement grants announced by central government for auto-parts industry TPSALi = Technology and production enhancement grants

(CAAM) show that the total output by value of 10,761 Chinese auto-parts companies topped $110 billion and was expected to reach $176 billion in 2010 (Xinhua News Agency 2010). For 2010, analysts predicted industry revenue of $195.31 billion, up 10.2 percent from 2009, and with annualized growth of 23.2 percent since 2005 (using constant 2010 dollars), slower than previous years because of the global financial crisis and slightly weaker downstream demand (IBISWorld). Table 6.1 shows the growth of

companies focus on particular parts or markets, and most concentrate on single products. Only some larger companies can manufacture a wide variety of auto parts. Typically, Chinese auto parts sell for around 30 percent to 50 percent less than comparable auto parts made in Europe, North America, or Japan. Estimating costs in the Chinese auto-parts industry becomes especially difficult because of subsidies to Tier 3 suppliers, including steel and glass manufacturers, and government-controlled

R&D facilities and tax breaks on returns from venture-capital investments in technology-based start-ups; cheap loans, and special-funding of domestic technologies to replace imported technologies; and national, provincial, and municipal procurement policies to favor indigenously developed technologies. McGregor (2011) detailed several of the underlying policies and institutions behind China’s indigenous innovation. In December 2009, China’s Ministry of Science and Technology (MOST), Ministry of

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