Does China Really Pick Winners?

Does China Really Pick Winners?

A new paper says China’s state subsidies don’t lift productivity.

By The Editorial Board, WSJ

Dec. 14, 2022 6:40 pm ET

Many in Congress believe industrial policy is China’s economic secret, but what if that’s not true? That’s the lesson in a notable new paper from the National Bureau of Economic Research, which finds that China’s government subsidies for business have little positive effect, and sometimes the opposite.

In “Government Subsidies and Firm Productivity in China,” authors Lee G. Branstetter, Guangwei Li and Mengjia Ren found “little evidence that the Chinese government consistently ‘picks winners.’”

Since 2007 all companies listed on any Chinese stock exchange have had to provide an accounting of subsidies. The authors looked at the subsidies and how they compared with a calculation of a company’s productivity over time. The idea was to see if Beijing is giving to firms that are already more productive, as well as if subsidies encouraged the firms to become more productive.`

The answer to both questions is no, and the authors looked at subsidies including those for research and development and industrial or equipment upgrades. Direct subsidies to Chinese companies overall grew to $29 billion in 2018 from $4 billion in 2007, but there was no plan to invest systematically in dynamic firms to supercharge their success.

Instead, the researchers found that Chinese subsidies may be vulnerable to special-interest politics and went to favored groups or to stabilize employment or industries in decline. “At the aggregate level,” the authors write, “subsidies seem to be allocated to less productive firms, and the relative productivity of firms’ receiving these subsidies appears to decline further after disbursement.”

Talk about myth busting. This should quell anxiety that Beijing’s state-directed allocation of capital is working for China, much less is a model for anyone else.

In a companion paper, Messrs. Branstetter and Li also examine President Xi Jinping’s signature “Made in China 2025” investments. They note that, although the “innovation promotion” subsidies went to companies in such politically favored industries as electric vehicles and computer chips, the recipients saw “little statistical evidence of productivity improvement or increases in R&D expenditure, patenting, and profitability.”

Some of this will sound familiar to readers who recall the U.S. fretting about Japan’s government-led growth model in the 1980s. In Japan, the researchers write, “the preponderance of support had not gone to the sectors or firms with the fastest productivity growth” but to shore up “politically connected but economically weak firms and industries.” We know how that turned out.

China is a formidable economic competitor, but the key to its success is the energy and ingenuity of its people, not central planning and state subsidies. The strength of the U.S. system is free-market competition and a rule of law that allow innovation and the private allocation of capital. Washington won’t subsidize any more wisely than Beijing does.