Zhu He & Guo Kai examine more than 5,300 A-share companies and argue that China’s new economy is increasingly driven by internal cash flow, equity financing, and profitability rather than cheap credit
I wonder whether the authors also considered capital injections from local government and its financing vehicles. Those would not necessarily have to be structured as credit or subsidy, but could also be cheap land, equity holdings by local banks or many other ways. Has that been taken in account?
OECD’s problem is that it starts from a political premise and then bends the data to reach a conclusion favorable to the West. This is not research. This is geopolitical narrative-building.
This article uses a large amount of data to expose the hypocrisy and ugliness behind the OECD’s framing. The OECD report relies heavily on so-called below-market borrowing, which accounts for two-thirds of its estimated subsidies to Chinese firms. But if the LPR is not the lowest preferential lending rate, but rather a market reference rate, then the OECD’s estimate of China’s low-interest loan subsidies is systematically overstated.
As I pointed out in my earlier report on industrial subsidies, subsidies are not unique to China. They exist across the world, and the United States is one of the most aggressive users. US industrial subsidies account for 1.34% of industrial output, higher than China’s 1.1%.
More importantly, subsidies can at most explain part of the financing environment. They cannot explain the core competitiveness of China’s new economy. The competitiveness of EVs, batteries, solar, semiconductors, computers, and new-energy equipment comes much more from scale economies, supply-chain density, engineering iteration, domestic competition, internal cash flow, and equity financing than from simple government handouts.
So why does even the OECD need to manufacture a China subsidy narrative?
There are two basic reasons.
First, it provides an external excuse for the West’s industrial defeats in global competition.
Second, it provides justification for tariffs and non-tariff barriers.
In the end, the subsidy narrative is not really about understanding China’s industrial rise. It is about giving the West a politically convenient story for why Chinese firms are winning.
There is a fundamental problem with the study; it ignores exchange rates. Now, there is more than one reason why the RMB would not appreciate, given the surplus levels, but it would require state action, since China regulates individuals'/firms' decisions to hold currencies other than the RMB.
I would not engage with the author, as there is an old adage that when engaged in a dispute with a regulator, if the facts/law are not supportive of your position, you have to argue. Confus'em! I could never do it, but I've known people who did, and to be honest, Trump does it a lot. That is why I disregard much of what he says.
If it is subsidies or capital controls, it does not really matter. Something is obviously wrong. Now, other countries can reasonably decide to let China do this, but it involves long-term risks I would not be inclined to take.
EU policymakers stand a far more realistic chance of weakening the euro than forcing RMB appreciation. Focus on levers you can actually manage instead of fixating on uncontrollable variables - some even deploy Confus'em! tactics as you mentioined.
As a responsible global stakeholder, China has layered core strategic priorities:
ranging from global order transition and UN reform to advancing the BRI. Past rounds of RMB revaluation failed to narrow EU trade imbalances, so pushing for RMB appreciation offers no meaningful solution to current bilateral tensions.
Odds of coordinated response are increasing. I still think tariffs are better, but currency appreciation is almost as good. Europe seems to be moving in that direction, and there are voices in US encouraging the Trump administration to work with Europe.
If I have enough capital and do not care if I make money, I can distort the heck out of markets. That is what China has done and I do not think that is what responsible friends do. Maybe it did it for reasons it feels are good for China's position in the world, rather than simply a mistake but I think with coordinated action it can be corrected. Whether such coordination will come together is very unclear.
We’ve covered the core currency and trade points here; the OECD’s flawed subsidy analysis from the main article remains the more foundational issue to address.
Arguing over subsidy levels is important but as China is not inclined to change it becomes a diversion from the issue of financial repression of Chinese savers. Both take place and until the last few days, no one was talking about it. Merz in Germany seems to recognize it. Whether anything will happen, I don't know.
I wonder whether the authors also considered capital injections from local government and its financing vehicles. Those would not necessarily have to be structured as credit or subsidy, but could also be cheap land, equity holdings by local banks or many other ways. Has that been taken in account?
OECD’s problem is that it starts from a political premise and then bends the data to reach a conclusion favorable to the West. This is not research. This is geopolitical narrative-building.
This article uses a large amount of data to expose the hypocrisy and ugliness behind the OECD’s framing. The OECD report relies heavily on so-called below-market borrowing, which accounts for two-thirds of its estimated subsidies to Chinese firms. But if the LPR is not the lowest preferential lending rate, but rather a market reference rate, then the OECD’s estimate of China’s low-interest loan subsidies is systematically overstated.
As I pointed out in my earlier report on industrial subsidies, subsidies are not unique to China. They exist across the world, and the United States is one of the most aggressive users. US industrial subsidies account for 1.34% of industrial output, higher than China’s 1.1%.
More importantly, subsidies can at most explain part of the financing environment. They cannot explain the core competitiveness of China’s new economy. The competitiveness of EVs, batteries, solar, semiconductors, computers, and new-energy equipment comes much more from scale economies, supply-chain density, engineering iteration, domestic competition, internal cash flow, and equity financing than from simple government handouts.
So why does even the OECD need to manufacture a China subsidy narrative?
There are two basic reasons.
First, it provides an external excuse for the West’s industrial defeats in global competition.
Second, it provides justification for tariffs and non-tariff barriers.
In the end, the subsidy narrative is not really about understanding China’s industrial rise. It is about giving the West a politically convenient story for why Chinese firms are winning.
There is a fundamental problem with the study; it ignores exchange rates. Now, there is more than one reason why the RMB would not appreciate, given the surplus levels, but it would require state action, since China regulates individuals'/firms' decisions to hold currencies other than the RMB.
I would not engage with the author, as there is an old adage that when engaged in a dispute with a regulator, if the facts/law are not supportive of your position, you have to argue. Confus'em! I could never do it, but I've known people who did, and to be honest, Trump does it a lot. That is why I disregard much of what he says.
If it is subsidies or capital controls, it does not really matter. Something is obviously wrong. Now, other countries can reasonably decide to let China do this, but it involves long-term risks I would not be inclined to take.
EU policymakers stand a far more realistic chance of weakening the euro than forcing RMB appreciation. Focus on levers you can actually manage instead of fixating on uncontrollable variables - some even deploy Confus'em! tactics as you mentioined.
As a responsible global stakeholder, China has layered core strategic priorities:
ranging from global order transition and UN reform to advancing the BRI. Past rounds of RMB revaluation failed to narrow EU trade imbalances, so pushing for RMB appreciation offers no meaningful solution to current bilateral tensions.
Odds of coordinated response are increasing. I still think tariffs are better, but currency appreciation is almost as good. Europe seems to be moving in that direction, and there are voices in US encouraging the Trump administration to work with Europe.
https://www.scmp.com/news/china/diplomacy/article/3357470/europe-rallies-around-tough-new-china-strategy-ahead-key-summit
If I have enough capital and do not care if I make money, I can distort the heck out of markets. That is what China has done and I do not think that is what responsible friends do. Maybe it did it for reasons it feels are good for China's position in the world, rather than simply a mistake but I think with coordinated action it can be corrected. Whether such coordination will come together is very unclear.
We’ve covered the core currency and trade points here; the OECD’s flawed subsidy analysis from the main article remains the more foundational issue to address.
Arguing over subsidy levels is important but as China is not inclined to change it becomes a diversion from the issue of financial repression of Chinese savers. Both take place and until the last few days, no one was talking about it. Merz in Germany seems to recognize it. Whether anything will happen, I don't know.
China isn't planning a D-Day invasion of Taiwan; they’re executing a slow, systematic strangulation. While the U.S. waits for domestic chip fabs to come online in 2030, Beijing is tightening the noose today using the Russian playbook. Here is why a sliver of silicon is the most dangerous geopolitical flashpoint on earth.https://triggledger.substack.com/p/the-silicon-choke-point-why-the-next?utm_source=share&utm_medium=android&r=8gc1qf