The U.S. Has Been Spending Billions to Revive Manufacturing. But China Is in Another League.
Chinese state support for industry eclipses other nations, with subsidies, loans and other perks fueling trade tensions with the West
SINGAPORE—Countries around the world are throwing tens of billions of dollars at manufacturing in a race to dominate clean energy, computer chips and other technologies of tomorrow.
But when it comes to lavishing support on its favored industries, China is in a league of its own.
Beijing easily outspends the U.S., the European Union and even other Asian export powerhouses in the support it grants its factories. By one estimate, China shovels a sum equivalent to almost 5% of its annual national income toward its industries, six times the level of support extended by the second-biggest spender, South Korea.
The immensity of China’s financial support for manufacturing is at the heart of the growing global backlash against a rising tide of Chinese exports pouring onto global markets. Western businesses are being outgunned and outclassed in everything from electric cars to solar panels and batteries. Homegrown industries in emerging markets can’t compete with the onslaught of cheap Chinese competition. Trade barriers to Chinese imports are going up around the world.
What is unusual about China, researchers say, isn’t just the scale of industrial support but also its breadth, assistance that has become more urgent as Chinese growth fizzles. Ninety-nine percent of publicly listed Chinese companies disclose some form of subsidy, according to the Kiel Institute, a German think tank.
Publicly listed firms declaring bumper subsidies include oil and gas majors, telecommunications providers, logistics firms and consumer-electronics makers, according to data provider Wind. Chinese battery maker Contemporary Amperex Technology, or CATL, in 2023 reported the largest subsidies of that year, totaling 5.7 billion yuan, equivalent to around $790 million.
In addition to state handouts, Chinese firms also have access to a huge apparatus of state support that Western governments and competitors say gives them a leg up in global markets.
They get cheap loans from China’s state-run banking system and a plethora of tax breaks. They also get cheap land from local authorities to set up factories, cheap steel from state-owned mills and cheap energy from state-owned utility companies. Government-backed investment funds channel billions of dollars in equity financing to firms that need capital.
“They are serious about this in a way which no one else is,” said Thomas Gatley, China analyst at Gavekal Dragonomics, a research firm.
The West still has many advantages that it hopes will keep its industries at the technological edge: deep capital markets, world-class research universities, robust intellectual-property laws and, in places such as Silicon Valley, a culture that rewards innovation.
Nonetheless, after decades of free-market orthodoxy, state support for manufacturing is again on the rise worldwide. Advanced economies are leading the charge, embracing a muscular industrial policy focused on sectors such as green energy and cutting-edge computer chips.
The Biden administration earmarked $53 billion to revive chipmaking in the U.S., and its Inflation Reduction Act is expected to provide tax breaks and subsidies worth hundreds of billions of dollars in the coming years to support the shift to greener forms of energy and transport. The EU and Japan have rolled out similar programs aimed at boosting green and other high-tech sectors.
China is in a different league. A paper by the Center for Strategic and International Studies, a Washington think tank, found Chinese spending on industrial policy amounted to around $250 billion in 2019, or around 1.7% of the country’s gross domestic product. That was twice as much as a share of its economy as second-place spender South Korea spent, and far in excess of the U.S. at 0.4% of GDP, Japan at 0.5% and France at 0.6%.
Scott Kennedy, one of the authors of the CSIS report, said in an updated analysis published in 2022 that the scale of Chinese state support could be as high as 4.9% of GDP, when generous government procurement policies and a broader method of accounting for cheap credit and state investment funds are considered.
While other countries have increased their spending on industrial policy, “China is still far out in front,” said Kennedy, chair of Chinese business and economics at CSIS.
China’s lavish support for industry is fueling a widening backlash overseas. The EU has announced tariffs on imports of Chinese electric vehicles to protect domestic producers from unfair competition. Chinese exporters are facing antidumping probes in countries including the U.K., India and Brazil, countries where local producers say they can’t compete with subsidized imports from China of products including construction machinery, steel and ceramics.
China says its industrial policies comply with international rules and that Western countries are embracing protectionism because their domestic industries are being outcompeted by Chinese rivals.
Corporations’ financial statements offer a window into the scale of the subsidies. Companies listed on the Shenzhen and Shanghai stock exchanges declared government subsidies in 2023 totaling $33 billion, according to Wind data.
Automaker SAIC declared subsidies of $560 million last year. Other big recipients included telecommunications firm China Mobile, Warren Buffett-backed carmaker BYD and consumer-electronics giant TCL Technology.
It isn’t just high-tech sectors pulling down the cash. Railway equipment manufacturer CRRC reported subsidies of $214 million last year, according to its annual report. State-owned oil-and-gas giant PetroChina logged subsidies of $343 million, according to its annual report.
Cheap loans are another critical component of Chinese industrial support. Lending to manufacturers is picking up sharply, as Beijing nudges credit away from real estate and instead champions high-tech “new productive forces” that it sees as essential for growth.
Researchers say cheap credit from China’s state-run banks accounts are even greater than state handouts. State-owned firms tend to get loans at lower interest rates than private enterprises in China, according to research by Gavekal and the Organization for Economic Cooperation and Development.
For instance, China’s chip champion, Semiconductor Manufacturing International Corp., or SMIC, said that in 2023, it paid an average of 2.10% on its long-term, yuan-denominated borrowings, compared with 4.2% for the central bank’s five-year lending benchmark late last year. SMIC didn’t respond to a request for comment.
In explaining its decision to impose tariffs on Chinese EVs, the European Commission found that some firms were using new loans and bond sales to repay old debts, which in most economies would be a sign of a risky borrower. Yet these firms nonetheless enjoyed top-notch credit ratings from Chinese rating firms and were able to borrow from state-owned banks at close to or below prevailing market interest rates.
“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,” the commission said in a 208-page report into China’s subsidy regime.
Overall, lending to industry has shot up 63% since the end of 2021, when real-estate lending effectively dried up. The People’s Bank of China provides cheap funding to banks to make loans for specific purposes, including high-tech manufacturing, green energy and upgrading industrial machinery.
Moreover, China spends more as a share of national income on tax incentives for industry than any other country, according to CSIS. Starting in 2020, chip makers manufacturing smaller and more advanced chips were exempted from income tax for a decade, while those making some less advanced types of chip could get exempted for the first five years and receive a 50% reduction for the following five years. Tax breaks are also available for firms in sectors including software, agriculture and infrastructure, according to PwC, a consulting firm.
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A growing source of state support is the use of government-controlled funds to provide plentiful equity financing to firms that need capital. The cash is raised from banks, provincial authorities, state-owned enterprises and some private investors. Around 2,000 such funds have been identified, some of which control billions of dollars. China’s largest chip fund, commonly known as the “Big Fund,” said in May it raised $48 billion to plow into the chip industry, on top of $47 billion it raised in previous funding rounds.
Other types of industrial-policy help include cheap land-use rights for firms wanting to build factories, and a tougher bureaucratic attitude toward foreign firms than domestic ones. Big state-owned firms also use their political and financial clout to hold off paying suppliers, which some analysts say should be counted as state support.
“Statism in the Chinese economy is not just U.S.S.R. 2.0,” said François Chimits, analyst at the Mercator Institute for China Studies in Brussels. “It is much more complicated.”
Write to Jason Douglas at jason.douglas@wsj.com and Clarence Leong at clarence.leong@wsj.com
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Appeared in the August 6, 2024, print edition as 'China’s Manufacturing Subsidies Lead World'.