![\"Subsidies](\"https:\/\/www.newsbeep.com\/il\/wp-content\/uploads\/2026\/07\/oecd.jpg\" "\\"The")
The OECD is right to examine China\u2019s industrial policies. (Reuters) <\/p>\n\n Subsidies do not explain China\u2019s competitiveness\n <\/p>\n
The OECD is right to examine China\u2019s industrial policies. (Reuters) <\/p>\n
\n\tChinese 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 \u2014 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.
\n\tThis 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\u2019 growing competitiveness. The OECD is applying an old framework to an economy that has changed.
\n\tThe report\u2019s first weakness is methodological. The OECD\u2019s estimates rely heavily on the concept of \u201cbelow-market borrowing,\u201d treating loans priced below China\u2019s Loan Prime Rate as subsidized finance. But that is not a preferential policy rate. It is closer to an average commercial lending rate in China\u2019s banking system.
\n\tThe arithmetic is revealing. China\u2019s five-year Loan Prime Rate is about 3.5 percent, while yields on 30-year government bonds are roughly 2.2 percent and 10-year bonds about 1.7 percent. A firm borrowing near the Loan Prime Rate 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.
\n\tThe data tells 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 in traditional sectors such as infrastructure, utilities and construction. Many of China\u2019s most competitive firms, by contrast, rely increasingly on retained earnings, equity financing and capital markets.
\n\tThe 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\u2019 capacity to provide support, the Chinese government\u2019s push to build a unified national market sought to curb local protectionism and subsidy competition among regions. Thus, China\u2019s emerging industries achieved their strongest gains during a period when subsidy intensity was declining and when local governments\u2019 budget constraints were hardening.
\n\tThe same interpretive problem appears in discussions of China\u2019s 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.\u00a0<\/p>\n
<\/p>\n
\n\t\tChina\u2019s greatest industrial asset today is probably not financial capital but engineering capital.<\/p>\n
\n
<\/p>\n
\n\t\tKai Guo<\/p>\n
<\/p>\n
\n\tHow does one explain China\u2019s competitiveness, then? The answer does not lie in a single policy but rather in the interaction of industrial organization, human capital, innovation and market scale. China now contains multiple stages of industrial development within one national market. Frontier metropolitan areas coexist with vast manufacturing networks, which creates an internal \u201cflying geese\u201d structure \u2014 moving some production to lower-cost inland regions \u2014 that spans much of the industrial value chain. Products can be designed, tested, manufactured and commercialized within a single integrated ecosystem before being deployed across a market of more than 1.4 billion people.
\n\tScale alone is not the point. The advantage lies in the interaction between scale, supply chains, competition and technical capacity. Dense supplier networks shorten feedback loops, large domestic markets accelerate commercialization and fierce competition forces firms to innovate and improve quickly. The resulting industrial strength reflects structural capabilities, not subsidies.
\n\tHuman capital is equally important. China produces about 3.6 million science, technology, engineering and mathematics graduates and 1.3 million engineers per year \u2014 more than any other economy. This high-skill workforce then improves manufacturing processes, absorbs and adapts technologies, solves production bottlenecks and increasingly supports innovation. China\u2019s greatest industrial asset today is probably not financial capital but engineering capital.
\n\tA subsidy-centered explanation of Chinese competitiveness misses all of this. It focuses on policy instruments while underestimating the industrial ecosystem in which firms operate. It counts government support but gives too little weight to technical talent, market scale, supply-chain depth and the speed with which Chinese firms move from adoption to innovation.
\n\tChina still faces serious challenges, of course. It needs higher household consumption, better resource allocation and a lower external imbalance. But addressing these problems will not weaken Chinese firms. Deeper capital markets, stronger domestic demand and a more unified national market will more likely than not reinforce many of the capabilities that have underpinned their rise.
\n\tThe OECD is right to examine China\u2019s industrial policies. But the real question is not how much China subsidizes its firms. It is how much those subsidies have translated into China\u2019s industrial success. Subsidies were never the whole story and, as China\u2019s economy has evolved and grown more competitive, they explain far less than the OECD assumes.<\/p>\n
\n\t\u2022 Kai Guo is Executive President and Senior Fellow of the CF40 Institute.
\n\t\u00a9Project Syndicate<\/p>\n
Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News’ point of view<\/p>\n","protected":false},"excerpt":{"rendered":"Subsidies do not explain China\u2019s competitiveness The OECD is right to examine China\u2019s industrial policies. (Reuters) Chinese…\n","protected":false},"author":2,"featured_media":549580,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[114,184,85,46],"class_list":["post-549579","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-economy","tag-il","tag-israel"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/549579","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/comments?post=549579"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/549579\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media\/549580"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media?parent=549579"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/categories?post=549579"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/tags?post=549579"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}