Since joining the World Trade Organisation (WTO) in 2001, China has often been accused by the US and its allies of a lack of transparency in granting numerous subsidies that favour domestic companies, giving them a competitive advantage in both domestic and global markets.

Those subsidies came into sharp focus during the trade war, with Washington expressing particular concern with their use in Beijing’s “Made in China 2025” industrial policy initiative that seeks to create global leaders in a range of cutting-edge hi-tech industries at the expense of the US and other developed countries.

In 2017 alone, the country offered hundreds of billions of yuan in subsidies to Chinese companies in a range of industries, with “Made in China 2025” only a small part.

Most of the money flowed to China’s state-owned enterprises (SOEs), which also enjoy easy, low-cost access to loans. The subsidies and loans enhance their dominant position in multiple sectors including banking, insurance, energy, and transport.

This irked both foreign companies and domestic private firms, which complain that the advantages that SOEs enjoy let them crowd out competition and restrict market access.

The subsidies have also allowed Chinese companies in certain industries to expand capacity rapidly and ship ever more goods to the rest of the world at lower prices.

The US claims this has led to a “non-market driven” global oversupply in a range of products, including steel, aluminium and solar panels, that is harming US businesses and destroying American jobs.

WTO rules require member countries to disclose all subsidies that are provided to a specific enterprise or industry, including production subsidies.

But Washington claims China has failed to disclose many of its subsidies, noting it took Beijing 15 years after joining the WTO to fill out its first report on local government subsidies.

“China never took it seriously that they really have to do this,” said Craig Allen, president of the US-China Business Council (USCBC). “What are the subsidies, that is very unclear.”

The US also complains that China, the world’s largest exporter of goods, had taken advantage of the WTO’s vague definition of what constitutes a subsidy, allowing Beijing to adopt alternative channels – such as government-backed investment funds for the “Made in China 2025" initiative – to support favoured industries while avoiding scrutiny by fellow WTO members.

“China is too big to allow subsidies to go unaddressed,” said Lester Ross, chairman of the policy committee at AmCham China.

2. Case study: ‘Made in China 2025’

China introduced the “Made in China 2025” initiative in 2015, aiming to make itself the world’s dominant player in 10 strategic hi-tech industries and so reduce reliance on foreign technology.

In 2017, the Chinese government offered more than 5.16 billion yuan (US$770 million) in subsidies to local governments to support the “Made in China 2025” programme, according to data from the Ministry of Finance.

Last year, “Made in China 2025” subsidies were 9.29 billion yuan.

In comparison, Germany allocated just 200 million euros (US$227 million) a year to fund its hi-tech strategy, Industry 4.0.

In addition to direct fiscal subsidies, China also set up a large number of state-owned venture capital funds to finance the project, including the National New Venture Capital Fund for Emerging Industries with over 40 billion yuan (US$5.97 billion) in capital, and the National Advanced Manufacturing Industry Investment Fund with 20 billion yuan at its disposal.

“They use government money but run in a private-sector manner,” USCBC president Allen noted. “The US is concerned that massive sums of capital is being invested in hi-tech industries to allow Chinese national champions to dominate those industries in the future.

“This is state-driven, not market-driven, so it violates the WTO.”

The foreign business community also argues that Chinese state-owned banks provide “inappropriate” subsidies, such as loans on non-commercial terms, to selected Chinese companies in “Made in China 2025” industries.

The subsidies and other help for “Made in China 2025” are also largely granted by provincial and municipal governments, further reducing transparency as there are no aggregated figures for local government support and data on provincial subsidies is fragmented.

3. What is China doing to address this?

After four days of trade negotiations in Beijing in February, Channel NewsAsia reported that China has pledged to end market-distorting subsidies to Chinese industries and promised to bring all subsidy programmes into compliance with WTO agreements.

However, in the report, China did provide details on how this commitment would be implemented.

The Wall Street Journal also reported that Chinese representatives had offered to eliminate subsidies given to Chinese consumers for purchasing new-energy and fuel efficient cars. China began to gradually cut subsidies for new-energy cars in 2016 and halted funding for solar panel industries in May 2018.

China also stopped requiring local governments to work specifically on “Made in China 2025” projects, although local support for certain hi-tech industries continues.

Finance vice-minister Zou Jiayi argued that China’s use of subsidies did not violate WTO rules, noting that Beijing had “fully abolished” subsidies that boost export performance or promote the use of domestic over imported goods.

She also said China had submitted over one thousand subsidy notifications to the WTO, including one covering all the provincial level subsidy policies between 2015 and 2016.

USCBC president Allen said that merely meeting the WTO requirements was not enough.

“What we really want is the removal of subsidies when they distort the market,” he said.

4. Chances of meeting US demands

It would be very difficult for China to end all subsidies that affect trade, especially given politically powerful SOEs receive most of the benefit.

President Xi Jinping has made clear that SOEs are a primary pillar of the “market economy with Chinese characteristics”, pledging that China would “make no change where there should not and cannot be any reform”.

This has led most foreign observers to expect little if any change in China’s subsidy practises as a result of the current trade talks.

“Anything’s possible, but in my opinion the chance of China meeting US demands is virtually zero,” said Usha Haley, a professor in international business and management at Wichita State University and an expert on Chinese subsidies.

“I am not optimistic as China has made no structural changes [in recent years]; indeed, subsidies have actually risen.”

Chinese companies in strategically important industries, including those identified in the “Made in China 2025” initiative, have virtually unlimited direct lines to “free money” and other non-monetary support, she said.

Ross of AmCham China said that a strong nationalistic determination to boost economic growth would also limit the chances of China meeting US demands.

“You can’t have your cake and eat it too,” he said. “China has been able to enjoy the subsidies for so long, they are unlikely to give them up.”

In addition, China’s central government does not fully control local authorities, who are motivated to offer subsidies to local businesses for political or personal gain.

USCBC president Allen said the first step is to agree on clearer definitions of subsidies under the WTO so that all members understand the limits.

“The words I use need to have the same meanings to you. If not, there will be problems,” he said.

Part five in the series will look at how to enforce the US demands.