Beijing’s plan to provide a basic national subsidy of 500 USD per child each year until the age of three has brought a focus back on China’s controversial subsidy policy. Demographers are sceptical about the outcome of this policy, as many couples are refusing to have more children.
Western observers and politicians have expressed deep concern over the adverse impacts of China’s subsidies on domestic producers and international trade. Their claim is that the subsidy policy is part of China’s broader strategy to manipulate both domestic and international dynamics.
The subsidy for couples to have children aims to address the population decline that threatens the world’s second-largest economy. Local governments in China have tried, mostly in vain, to lift the country’s shrinking birth rate with perks, cash rewards, and housing subsidies. Now, the central government has decided to step in.
Ironically, the subsidy policy is not restricted to population expansion or demographics alone. Across various sectors, the sole purpose of the subsidy policy is to use fraudulent means to help the government, Chinese companies, or institutions gain an edge over competitors at the global level. In addition to state subsidies, the government also offers firms land grants and tax breaks.
China’s controversial subsidy policy has received severe criticism from foreign competitors who argue that the country’s artificially low prices create an uneven playing field. These critics assert that the playing field is tilted in favour of China alone.
This state-supported development spans the entire rare earth element supply chain—from mining to refining to high-tech manufacturing (e.g., magnets, batteries, and defense technology). Environmentalists have alleged that Chinese companies that acquire mining rights abroad often send the mined elements back to China. Processing firms in China also purchase raw materials from other mining companies, consolidating China’s dominance in rare earth mining.
Recognizing the value of rare earths early—dating back to the 1980s—China began systematically investing in mining and refining capacity. Land grants and tax breaks further reinforce its competitive edge.
Subsidies and Global Trade Distortion
Available data shows a marked increase in subsidy utilization in China and other major economies between 2009 and 2022. The IMF which investigated the effects of China’s subsidies on international trade flows at the product level during this period, found that subsidies had promoted Chinese exports while limiting imports. These effects were amplified by supply-chain linkages, where subsidies given to upstream industries significantly boosted the exports of downstream industries. Further analysis of price and quantity effects revealed that China’s subsidies lowered export prices and increased export volumes in sectors such as metal products, furniture, and autos. However, in sectors like electrical machinery, the data were more consistent with quality upgrades than quantity expansion.
According to the Australian Institute of International Affairs, the IMF’s findings validated long-standing concerns from Western observers and politicians regarding the impact of Chinese subsidies on global trade. The institute raised questions about the role of China’s subsidies in trade distortion, emphasizing that China’s focus is strategic. Roughly 20% of sectors received over 50% of subsidies, with key products such as batteries, solar panels, and electric vehicles (EVs) among the most heavily supported. As the world’s largest steel producer, China has also been accused of flooding global markets with cheap steel, thanks to generous government subsidies that distort market signals. Japan and South Korea are now exploring anti-dumping actions in response.
The Rhodium Group has found flaws in China’s industrial policy, leading to market distortions. They describe it as deeply systemic rather than targeted, with far-reaching effects on global trade. China uses a broader range of state-support mechanisms to support its companies. Experts argue that the Chinese practices and instruments have gone too far, distorting market competition and providing advantages to domestic firms. The state’s pervasive and systemic involvement in the economy occurs on a much larger scale than is typical, according to these experts.
WTO and Subsidy Compliance
While not all of China’s practices qualify as countervailable subsidies under the WTO’s Agreement on Subsidies and Countervailing Measures (SCM), their widespread use creates substantial distortive effects. For example, research shows that more than 98% of A-share listed companies in China had received subsidies in 2020. Since joining the WTO, China has rolled back many grant and tax incentive policies that were clearly non-compliant with WTO rules. However, research indicated that some current practices remain discriminatory and could still be considered actionable subsidies under WTO rules. The provision of below-market inputs remains one of the most difficult areas to assess, primarily due to the non-availability of data. Although there is no clear evidence that China subsidizes energy more than its global peers, there is a systematic bias toward low industrial land prices, which benefits the entire industrial sector. Additionally, state-owned enterprises supply below-market intermediate inputs to key sector firms. However, persistent systemic distortions in China’s economy can mimic the effects of conventional subsidies and state-support tools.
The Electric Vehicle (EV) Sector and Fraudulent Practices
China’s electric vehicle (EV) industry has experienced explosive growth in recent years, much of which has been attributed to incentives from the Chinese government. While this support has positioned China as a global EV leader, closer scrutiny revealed that not all subsidies have been properly claimed. A well-known car website disclosed that even major names in the EV space, including BYD and Chery Automobile, reportedly received funds they were not entitled to.
In fact, a nationwide investigation conducted by the Chinese government in early 2016 found that some manufacturers had cheated the government to receive subsidies. As the largest auto market in the world, China had been committed to promoting electric vehicles (EVs) since 2009, with the aim of having 5 million EVs on Chinese roads by 2020. However, it offered substantial fiscal subsidies, at both the national and local levels. By the end of 2015, the Chinese national government had poured 4.87 billion USD into its EV market, and EV sales skyrocketed from 2,300 in 2009 to 507,000 in 2016. Electric passenger car sales hit a record of 336,000 in 2016. But the audit of China’s EV subsidy program from 2016 through 2020 revealed that around 121 million USD was distributed to automakers that did not meet the qualifying criteria. Chery, for example, claimed 33 million USD for around 8,860 electric and hybrid vehicles that were not even eligible. The Ministry of Industry and Information Technology confirmed that 20 million USD in subsidies was provided to BYD for just 4,900 cars. It is still not clear if these funds were returned or adjusted in later payments, according to Bloomberg’s report.
Available reports indicated that companies were supplying vehicles to dealers in bulk, who then registered them as sales. These cars were later sold as “zero-mileage used cars.” Given the controversies surrounding China’s subsidy policy, the global community must closely monitor its actions and hold it accountable whenever it attempts to alter international trade dynamics. International bodies like the IMF and WTO must stay vigilant regarding China’s subsidy strategies, which continue to distort the global trade game.