According to a study by the Center for Strategic and International Studies (CSIS) released on Monday, May 23rd, China spends vast funds on industrial support to compete with the West.
The study finds that China is spending enormously on industrial policy, and the number is estimated conservatively to be at least 1.73 percent of its 2019 gross domestic product (GDP).
That is more than 248 billion dollars at nominal exchange rates and 407 billion dollars at purchasing power parity exchange rates. The figure is higher than the country’s defense budget spending for 2019.
China’s spending on industrial support, both as a share of GDP and in dollar terms, is much more than any other economy in the study, including Brazil, France, Germany, Japan, Taiwan, South Korea, and the U.S.
By comparison, South Korea, the second-largest spender, spent 0.67% of its GDP, while the U.S. spent 0.39% on industrial support in 2019.
China uses various instruments to achieve its goals. But two tools stand out, direct subsidies and below-market credit for state-owned enterprises. Others include debt-equity swaps, government guidance funds, government support for R&D, tax incentives, and state-owned enterprise net payables.
China’s approach to industrial support is different from the West. Major economies scale back their support for the industrial policy as the economy matures. However, in recent years, Beijing still has kept sustaining or increasing industrial policy spending with GDP growth, resulting in steady spending as a share of GDP.
The CSIS study is one of the first studies trying to quantify China’s overall manufacturing support compared with other economies.
Last year, Washington reportedly planned to target Beijing’s industrial subsidies that support its local companies’ competitive advantage over foreign rivals. Such a move can further deteriorate the relationship between the two countries.
As the Wall Street Journal reported, the U.S. officials might consider launching a probe into Chinese subsidies under the U.S. trade law’s Section 301 which could lead to new tariffs.
Washington also wants to team up with the European Union, Japan, and other Asian allies and the World Trade Organization to target Chinese subsidies.
According to the Wall Street Journal, many experts and Western politicians previously assumed that China would gradually reduce the regime’s direct role in allocating the country’s resources as the economy matured. However, state involvement in industrial objectives has increased over the years.
The study noted that “While other East Asian economies transitioned to lighter-touch policies earlier in their development, as discussed below, China is pursuing vertical policies at the frontier of innovation while still a middle-income economy.”
The study also shows that China’s industrial goals have become more ambitious in recent years. The communist regime is now shifting from catching up to Western technologies to targeting future frontier industries like electric vehicles and artificial intelligence.
The Wall Street Journal cited research firm Zero2IPO, showing that about 1,851 of China’s government-guided funds had been founded by 2020. The total funding target was 1.7 trillion dollars, while the actual money raised was around 820 billion dollars.
One of them is a new government-backed semiconductor fund founded in 2019. The fund has raised more than $29 billion to meet its national strategic objectives.