Kai Guo
Chinese firms have achieved global leadership in industries once assumed to be the preserve of advanced economies: electric vehicles, batteries, industrial robots, solar panels, and AI—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 OECD report. This particular 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’ growing competitiveness. The report’s first weakness is methodological. The OECD’s estimates rely heavily on the concept of “below-market borrowing,” treating loans priced below China’s Loan Prime Rate as subsidised finance. But the LPR is not a preferential policy rate. It is closer to an average commercial lending rate in China’s banking system. The arithmetic is revealing. China’s five-year LPR is around 3.5%, while yields on 30-year government bonds are roughly 2.2% and ten-year bonds around 1.7%. A firm borrowing near the LPR is paying far more than the sov ereign itself. The data tell a similarly awkward story. Evidence from more than 5,300 listed Chinese non-financial 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’s most competitive firms, by contrast, rely increasingly on retained earnings, equi ty fi nancing, and capital markets. The 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’ capacity to provide support, the Chinese government’s push to build a unified national market sought to curb local protectionism and subsidy competition among regions. The same interpretive prob lem appears in discussions of China’s 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.
How does one explain China’s 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. Scale alone is not the point. The advantage lies in the interaction between scale, supply chains, competition, and technical capacity. Human capital is equally important. China produces roughly 3.6 million STEM graduates and 1.3 million engineers per year—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’s greatest industrial asset today is probably not financial capital, but engineering capital.
A subsidy-centred 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. China 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. The OECD is right to examine China’s industrial policies. But the real question is not how much China subsidizes its firms. It is how much those subsidies have translated into China’s industrial success. Subsidies were never the whole story, and as China’s economy has evolved and grown more competitive, they explain far less than the OECD assumes.
The writer is an RGC Junior Research Fellow.
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