TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Popular Reads
Top Results
No results found. Please check your search term and try again
Can't find what you're looking for?
View all search results
Popular Reads
Top Results
No results found. Please check your search term and try again
Can't find what you're looking for?
View all search resultsSubsidies do not explain China's competitiveness
Like every major economy, China does use industrial policy, and its subsidies have mattered. But subsidies are no longer the most convincing explanation for Chinese firms’ growing competitiveness.
Change text size
Gift Premium Articles
to Anyone
Share the best of The Jakarta Post with friends, family, or colleagues. As a subscriber, you can gift 3 to 5 articles each month that anyone can read—no subscription needed!
Individual investors visit a securities firm on June 6 in the complex of the West Kowloon rail station in Hong Kong, China. (AFP/Tommy Wang)
C
hinese firms have achieved global leadership in industries once assumed to be the preserve of advanced economies: electric vehicles, batteries, industrial robots, solar panels and artificial intelligence — to name just a few. The standard explanation for this success is that the Chinese state subsidizes production, an argument that has now been given the institutional weight of a major Organisation for Economic Co-operation and Development report.
This particular report matters because its conclusions are likely to shape policy debates well beyond the OECD itself. Yet the subsidy story is incomplete and increasingly inadequate. Like every major economy, China does use industrial policy, and its subsidies have mattered. But subsidies are no longer the most convincing explanation for Chinese firms’ growing competitiveness. The OECD is applying an old framework to an economy that has changed.
The report’s first weakness is methodological. The OECD’s estimates rely heavily on the concept of “below-market borrowing,” treating loans priced below China’s Loan Prime Rate (LPR) as subsidized finance. But the LPR is not a preferential policy rate. It is closer to an average commercial lending rate in China’s banking system.
The arithmetic is revealing. China’s five-year LPR is around 3.5 percent, while yields on 30-year government bonds are roughly 2.2 percent and ten-year bonds around 1.7 percent. A firm borrowing near the LPR is paying far more than the sovereign itself. Treating such lending as subsidized finance risks converting ordinary commercial borrowing into statistical evidence of government support.
The data tell a similarly awkward story. Evidence from more than 5,300 listed Chinese nonfinancial firms shows that the bulk of bank lending still flows to state-owned enterprises (SOEs) in traditional sectors such as infrastructure, utilities and construction. Many of China’s most competitive firms, by contrast, rely increasingly on retained earnings, equity financing and capital markets.
The timing is no less important. Between 2023 and 2025, subsidy intensity among listed new-economy firms declined substantially, and not by accident. While rising local-government debt sharply constrained local authorities’ capacity to provide support, the Chinese government’s push to build a unified national market sought to curb local protectionism and subsidy competition among regions. Thus, China’s emerging industries achieved their strongest gains during a period when subsidy intensity was declining, and when local governments’ budget constraints were hardening.
The same interpretive problem appears in discussions of China’s current-account surplus. Its recent increase is often read as evidence that China has doubled down on export-led growth. But the simpler explanation lies in the domestic economy. After the property downturn, investment weakened more than national saving, and since the current-account balance is the difference between saving and investment, the surplus widened almost mechanically. Much of the adjustment reflects a property cycle, not a deliberate export strategy.
