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The linkages between trade and industrial policies:
An analysis of China’s subsidies and competitive neutrality
Alicia Garcia Herrero – Chief Economist Asia Pacific, Natixis
+852 3900 8680 – alicia.garciaherrero@natixis.com
November 2022
C2 - Internal Natixis
Roadmap to presentation
2
Why is China relevant?
How big are China’s government subsidies?
How well is competitive neutrality in China?
C2 - Internal Natixis
Why is China relevant?
3
1
C2 - Internal Natixis
From globalization to competition policy
4
• The process of globalization has created important links between
industrial policy and trade, which will be increasingly relevant when
designing competition policy.
• To make things even more complicated, and contrary to what had
been expected after the entry to the WTO of the ex-Soviet Union
blocks as well as China, some parts of the global economy have
remained planned.
• China is a good example with growing economic size but subsidies
are a global phenomenon.
C2 - Internal Natixis
5
Massive contribution to global growth (nearly 30% from 2011 to 2021) and its sheer
economic size by now (close to USD 14 trillion)
Why is China relevant?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
81 83 85 87 89 91 93 95 97 99 01 03 05 07 10 12 14 16 18 21
Contribution to World's Growth
China United States European Union Others
Source: Natixis, IMF World Economic Outlook. 2009 and 2020 are omitted in order to
reduce volatility.
0
2
4
6
8
10
12
14
16
0
2
4
6
8
10
12
14
16
18
78 81 84 87 90 93 96 99 02 05 08 11 14 17 20
China's GDP growth since 1978
GDP (USD trillion) % YoY (rhs)
Source: CEIC, Natixis
C2 - Internal Natixis
6
China’s huge export share but also global corporate presence
Export share of global exports has increased again to over 15% and China already
has more Fortune 500 than the US
0
50
100
150
200
250
0
50
100
150
200
250
96 98 00 02 04 06 08 10 12 14 16 18 20 22
Number of Firms in Fortune 500 by Country
China US
Source: Natixis, Fortune 500
0
2
4
6
8
10
12
14
16
0
2
4
6
8
10
12
14
16
79 82 85 88 91 94 97 00 03 06 09 12 15 18 21
Market Share of Global Gross Exports (%)
Germany US Japan China
Source: Natixis, UNCTAD
C2 - Internal Natixis
7
At the same time, China is moving further away from a market economy towards an
interventionist model, with confirmation in the 20th Party Congress
State-led
innovation
Housing is for
living, not for
speculation
Focus on the real
economy
China: Key Points from 20th Party Congress
Support tech sector for self
sufficiency
Still tight grips on real estate
More responsibilities for financial
sector
Source: Natixis
20th Party Congress (2022):
“We will work to see state-owned capital and enterprises get
stronger, do better, and grow bigger; and enhance the core
competitiveness of SOEs……”
“ 推 动国有资本和国有企业做强做优做大,提升企业核心
竞争力 ”
19th Party Congress (2017):
“We will work to see that state assets maintain and increase
their value; we will support state capital in becoming stronger,
doing better, and growing bigger, and take effective measures to
prevent the loss of state assets……”
“ 促进国有资产保值增值, 推 动国有资本做强做优做大,
有效防止国有资产流失 ”
C2 - Internal Natixis
8
Overseas revenues have been growing since 2013 (although stagnating since 2017)
but remain very large for two key sectors, semiconductor assembly and information
technology
7 7
8
9
11 11 11
0
2
4
6
8
10
12
0
2
4
6
8
10
12
13 14 15 16 17 18 19
Proportion of Overseas Revenue (%)
N.B. China onshore shares included.
Source: Natixis, Financial Statements, WIND
0
1
1
2
5
5
8
8
11
12
14
15
17
37
49
0 20 40 60
Real Estate
Communication Services
Utilities
Energy
Consumer Staples
Financials
Infrastructure
Healthcare
Overall
Materials
Automobiles
Industrials
Consumer Discretionary
Information Technology
Semiconductors
Chinese Corporates' Revenue from
Overseas by Sector (%, 2019)
C2 - Internal Natixis
How big are China’s
government subsidies?
9
2
C2 - Internal Natixis
10
Government interference in the economy happens in many ways with subsidies
being only one of them. Subsidies have continued to increase over time, even before
COVID and are directed to private companies as much as state-owned ones
How big are China’s government subsidies
78
80
82
84
86
0
50
100
150
200
250
300
350
17 18 19 20
Total Subsidies (RMb bn) % of Firms with Subsidies (rhs)
N.B. Listed firms in both onshore and offshore markets included.
Source: Natixis, Financial Statements, Bloomberg
China: Direct Government Subsidies into Listed Firms
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
17 18 19 20
China: Share of Government Subsidies to
Profit (%)
SOE POE
N.B. Listed firms in both onshore and offshore markets included.
Source: Natixis, Financial Statements, Bloomberg, WIND
C2 - Internal Natixis
11
Subsidies are offered in new and traditional sectors, and a good part of them go to
keep loss-making institutions afloat
0
5
10
15
20
0 5 10 15 20 25 30 35
0 100 200
Telecommunication Services
Real Estate
Retailing
Diversified Financials
Food, Beverage & Tobacco
Utilities
Capital Goods
Health Care
Materials
Energy
Media & Entertainment
Consumer Services
Pharmaceuticals
Household Products
Consumer Durables & Apparel
Professional Services
Food & Staples Retailing
Semiconductors
Transportation
Automobiles
Technology Hardware
Software & Services
China: Direct Government Subsidies per Sub-sector
(2017-2020)
Government Subsidies (RMB bn, Lower axis)
Share to Profit (%, Upper axis)
N.B. Listed firms in both onshore and offshore markets included.
Source: Natixis, Financial Statements, Bloomberg, WIND
0 10 20 30 40 50
Telecommunication Services
Professional Services
Household & Personal Products
Diversified Financials
Health Care
Media & Entertainment
Retailing
Real Estate
Food & Staples Retailing
Pharmaceuticals
Consumer Durables & Apparel
Materials
Utilities
Energy
Consumer Services
Software & Services
Food, Beverage & Tobacco
Capital Goods
Semiconductors
Transportation
Technology Hardware
Automobiles & Components
China: Share of Loss-making Firms and Government
Subsidies per Sub-sector (2020)
Additional Increase Without Subsidies With Subsidies
N.B. Listed firms in both onshore and offshore markets included.
Source: Natixis, Financial Statements, Bloomberg, WIND
C2 - Internal Natixis
12
Identifying China’s government support is not easy. Below are two reasons
• The government’s control of the financial sector is
huge, with two very large development banks in
charge of supporting strategic sectors but through its
state-owned commercial banks (41% of total
commercial banks’ assets). The vast majority of
remaining banks are very much influenced by local
governments, which have also supported acquisitions
overseas.
• Beyond finance, the oligopolistic nature of most SOEs
in sectors (e.g. energy, electricity, telecom) allows
firms to accumulate profits, which can be used for
acquisitions abroad (given China’s lax dividend policy
for SOEs)
State-
owned
commercial
bank
41%
Joint-stock
Commercia
l bank
18%
City
Commercia
l Bank
13%
Rural
Commercia
l Bank
13%
Other
Financial
Institution
15%
Chinese Bank: Share of Total Asset
by Category (%)
Source: Natixis, WIND
C2 - Internal Natixis
13
The oligopolistic nature of some markets in China has helped Chinese
companies expand abroad
Date Acquirer Name Target Name
Total Value
(USD mn)
Industry
2/3/2016 China National Chemical Corp Ltd Syngenta AG 45541 Basic Material
6/24/2009 China Petrochemical Corp Addax Petroleum Corp 8827 Energy
11/25/2015 China Three Gorges Corp
Jupia & Ilha Solteira hydro plants
concession
3679 Utilities
11/13/2013 China National Petroleum Corp Petrobras Energia Peru SA 2600 Energy
11/13/2020 State Grid Corp of China Cia General de Electricidad SA 1616 Utilities
C2 - Internal Natixis
How well is competitive
neutrality in China?
14
3
C2 - Internal Natixis
Competitive neutrality
15
China’s competitive advantage in global trade markets is partially explained by
industrial policy. Beyond subsidies, cheaper finance and a lower tax burden are
important instruments. This also means that not all Chinese companies have the
same opportunities, let alone foreign companies.
0
1
2
3
4
5
6
7
14 15 16 17 18 19
Funding Cost (%)
SOE POE
N.B. Funding cost is calculated from interest expense over total debt
Source: Bruegel, Financial Statements, Bloomberg
0
5
10
15
20
25
30
35
14 15 16 17 18 19
Effective Tax Rate (%)
SOE POE
Source: Bruegel, Financial Statements, Bloomberg
Debt Neutrality Tax Neutrality
C2 - Internal Natixis
16
The sectors which are further away from competitive neutrality are not necessarily
those that might be deem more strategic but rather those which are the bulk of
Chinese exports (ICT) and, more recently, autos (electric vehicles).
POE>SO
E
Funding Cost (%)
POE<SO
E
Effective
Tax
Rate
(%)
POE<SO
E
POE>SOE
Overall
Automobiles
Consumer
Health Care Industrial
Materials
Real Estate
Renewables
Semiconduct
ors
ICT
-35
-25
-15
-5
5
15
25
35
-3 -2 -1 0 1 2 3
C2 - Internal Natixis
Conclusions
17
Based on China’s case, the link between industrial and trade policy is clear.
China is surely not the only case so it would be worth exploring the
linkages across different countries.
Competition authorities have an important role to play:
• Advocating for competitive neutrality at a global scale.
• Including foreign subsidies in its competition enforcement cases:
• EU’s foreign subsidy legislation is an important example
• Also stepping up control for subsidies for foreign acquisitions (US
Foreign Merger Subsidy Disclosure Act)
C2 - Internal Natixis
Disclaimer
18
Disclaimer
The information contained in this publication and any attachment thereto is exclusively intended for a client base consisting of professionals and qualified investors. This document and any attachment thereto are strictly confidential and cannot be
divulgated to a third party without the prior written consent of Natixis. If you are not the intended recipient of this document and/or the attachments, please delete them and immediately notify the sender. Distribution, possession or delivery of
this document in, to or from certain jurisdictions may be restricted or prohibited by law. Recipients of this document are required to inform themselves of and comply with all such restrictions or prohibitions. Neither Natixis, nor any of its affiliates,
directors, employees, agents or advisers or any other person accepts any liability to any person in relation to the distribution, possession or delivery of this document in, to or from any jurisdiction.
This document has been developed by our economists. It does not constitute a financial analysis and has not been developed in accordance with legal requirements designed to promote the independence of investment research. Accordingly, there
are no prohibitions on dealing ahead of its dissemination.
This document and all attachments are communicated to each recipient for information purposes only and do not constitute a personalized investment recommendation. They are intended for general distribution and the products or services
described herein do not take into account any specific investment objective, financial situation or particular need of any recipient. This document and any attachment thereto shall not be construed as an offer nor a solicitation for any purchase,
sale or subscription. Under no circumstances should this document be considered as an official confirmation of a transaction to any person or entity and no undertaking is given that the transaction will be entered into under the terms and
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formal approval of Natixis according to its prevailing internal procedures.
Natixis has neither verified nor carried out independent analysis of the information contained in this document. Accordingly, no representation, warranty or undertaking, either express or implied, is made to the recipients of this document as to or
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Subsidies, competition and trade – GARCÍA-HERRERO – December 2022 OECD discussion

  • 1. The linkages between trade and industrial policies: An analysis of China’s subsidies and competitive neutrality Alicia Garcia Herrero – Chief Economist Asia Pacific, Natixis +852 3900 8680 – alicia.garciaherrero@natixis.com November 2022
  • 2. C2 - Internal Natixis Roadmap to presentation 2 Why is China relevant? How big are China’s government subsidies? How well is competitive neutrality in China?
  • 3. C2 - Internal Natixis Why is China relevant? 3 1
  • 4. C2 - Internal Natixis From globalization to competition policy 4 • The process of globalization has created important links between industrial policy and trade, which will be increasingly relevant when designing competition policy. • To make things even more complicated, and contrary to what had been expected after the entry to the WTO of the ex-Soviet Union blocks as well as China, some parts of the global economy have remained planned. • China is a good example with growing economic size but subsidies are a global phenomenon.
  • 5. C2 - Internal Natixis 5 Massive contribution to global growth (nearly 30% from 2011 to 2021) and its sheer economic size by now (close to USD 14 trillion) Why is China relevant? 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 81 83 85 87 89 91 93 95 97 99 01 03 05 07 10 12 14 16 18 21 Contribution to World's Growth China United States European Union Others Source: Natixis, IMF World Economic Outlook. 2009 and 2020 are omitted in order to reduce volatility. 0 2 4 6 8 10 12 14 16 0 2 4 6 8 10 12 14 16 18 78 81 84 87 90 93 96 99 02 05 08 11 14 17 20 China's GDP growth since 1978 GDP (USD trillion) % YoY (rhs) Source: CEIC, Natixis
  • 6. C2 - Internal Natixis 6 China’s huge export share but also global corporate presence Export share of global exports has increased again to over 15% and China already has more Fortune 500 than the US 0 50 100 150 200 250 0 50 100 150 200 250 96 98 00 02 04 06 08 10 12 14 16 18 20 22 Number of Firms in Fortune 500 by Country China US Source: Natixis, Fortune 500 0 2 4 6 8 10 12 14 16 0 2 4 6 8 10 12 14 16 79 82 85 88 91 94 97 00 03 06 09 12 15 18 21 Market Share of Global Gross Exports (%) Germany US Japan China Source: Natixis, UNCTAD
  • 7. C2 - Internal Natixis 7 At the same time, China is moving further away from a market economy towards an interventionist model, with confirmation in the 20th Party Congress State-led innovation Housing is for living, not for speculation Focus on the real economy China: Key Points from 20th Party Congress Support tech sector for self sufficiency Still tight grips on real estate More responsibilities for financial sector Source: Natixis 20th Party Congress (2022): “We will work to see state-owned capital and enterprises get stronger, do better, and grow bigger; and enhance the core competitiveness of SOEs……” “ 推 动国有资本和国有企业做强做优做大,提升企业核心 竞争力 ” 19th Party Congress (2017): “We will work to see that state assets maintain and increase their value; we will support state capital in becoming stronger, doing better, and growing bigger, and take effective measures to prevent the loss of state assets……” “ 促进国有资产保值增值, 推 动国有资本做强做优做大, 有效防止国有资产流失 ”
  • 8. C2 - Internal Natixis 8 Overseas revenues have been growing since 2013 (although stagnating since 2017) but remain very large for two key sectors, semiconductor assembly and information technology 7 7 8 9 11 11 11 0 2 4 6 8 10 12 0 2 4 6 8 10 12 13 14 15 16 17 18 19 Proportion of Overseas Revenue (%) N.B. China onshore shares included. Source: Natixis, Financial Statements, WIND 0 1 1 2 5 5 8 8 11 12 14 15 17 37 49 0 20 40 60 Real Estate Communication Services Utilities Energy Consumer Staples Financials Infrastructure Healthcare Overall Materials Automobiles Industrials Consumer Discretionary Information Technology Semiconductors Chinese Corporates' Revenue from Overseas by Sector (%, 2019)
  • 9. C2 - Internal Natixis How big are China’s government subsidies? 9 2
  • 10. C2 - Internal Natixis 10 Government interference in the economy happens in many ways with subsidies being only one of them. Subsidies have continued to increase over time, even before COVID and are directed to private companies as much as state-owned ones How big are China’s government subsidies 78 80 82 84 86 0 50 100 150 200 250 300 350 17 18 19 20 Total Subsidies (RMb bn) % of Firms with Subsidies (rhs) N.B. Listed firms in both onshore and offshore markets included. Source: Natixis, Financial Statements, Bloomberg China: Direct Government Subsidies into Listed Firms 0 2 4 6 8 10 12 14 0 2 4 6 8 10 12 14 17 18 19 20 China: Share of Government Subsidies to Profit (%) SOE POE N.B. Listed firms in both onshore and offshore markets included. Source: Natixis, Financial Statements, Bloomberg, WIND
  • 11. C2 - Internal Natixis 11 Subsidies are offered in new and traditional sectors, and a good part of them go to keep loss-making institutions afloat 0 5 10 15 20 0 5 10 15 20 25 30 35 0 100 200 Telecommunication Services Real Estate Retailing Diversified Financials Food, Beverage & Tobacco Utilities Capital Goods Health Care Materials Energy Media & Entertainment Consumer Services Pharmaceuticals Household Products Consumer Durables & Apparel Professional Services Food & Staples Retailing Semiconductors Transportation Automobiles Technology Hardware Software & Services China: Direct Government Subsidies per Sub-sector (2017-2020) Government Subsidies (RMB bn, Lower axis) Share to Profit (%, Upper axis) N.B. Listed firms in both onshore and offshore markets included. Source: Natixis, Financial Statements, Bloomberg, WIND 0 10 20 30 40 50 Telecommunication Services Professional Services Household & Personal Products Diversified Financials Health Care Media & Entertainment Retailing Real Estate Food & Staples Retailing Pharmaceuticals Consumer Durables & Apparel Materials Utilities Energy Consumer Services Software & Services Food, Beverage & Tobacco Capital Goods Semiconductors Transportation Technology Hardware Automobiles & Components China: Share of Loss-making Firms and Government Subsidies per Sub-sector (2020) Additional Increase Without Subsidies With Subsidies N.B. Listed firms in both onshore and offshore markets included. Source: Natixis, Financial Statements, Bloomberg, WIND
  • 12. C2 - Internal Natixis 12 Identifying China’s government support is not easy. Below are two reasons • The government’s control of the financial sector is huge, with two very large development banks in charge of supporting strategic sectors but through its state-owned commercial banks (41% of total commercial banks’ assets). The vast majority of remaining banks are very much influenced by local governments, which have also supported acquisitions overseas. • Beyond finance, the oligopolistic nature of most SOEs in sectors (e.g. energy, electricity, telecom) allows firms to accumulate profits, which can be used for acquisitions abroad (given China’s lax dividend policy for SOEs) State- owned commercial bank 41% Joint-stock Commercia l bank 18% City Commercia l Bank 13% Rural Commercia l Bank 13% Other Financial Institution 15% Chinese Bank: Share of Total Asset by Category (%) Source: Natixis, WIND
  • 13. C2 - Internal Natixis 13 The oligopolistic nature of some markets in China has helped Chinese companies expand abroad Date Acquirer Name Target Name Total Value (USD mn) Industry 2/3/2016 China National Chemical Corp Ltd Syngenta AG 45541 Basic Material 6/24/2009 China Petrochemical Corp Addax Petroleum Corp 8827 Energy 11/25/2015 China Three Gorges Corp Jupia & Ilha Solteira hydro plants concession 3679 Utilities 11/13/2013 China National Petroleum Corp Petrobras Energia Peru SA 2600 Energy 11/13/2020 State Grid Corp of China Cia General de Electricidad SA 1616 Utilities
  • 14. C2 - Internal Natixis How well is competitive neutrality in China? 14 3
  • 15. C2 - Internal Natixis Competitive neutrality 15 China’s competitive advantage in global trade markets is partially explained by industrial policy. Beyond subsidies, cheaper finance and a lower tax burden are important instruments. This also means that not all Chinese companies have the same opportunities, let alone foreign companies. 0 1 2 3 4 5 6 7 14 15 16 17 18 19 Funding Cost (%) SOE POE N.B. Funding cost is calculated from interest expense over total debt Source: Bruegel, Financial Statements, Bloomberg 0 5 10 15 20 25 30 35 14 15 16 17 18 19 Effective Tax Rate (%) SOE POE Source: Bruegel, Financial Statements, Bloomberg Debt Neutrality Tax Neutrality
  • 16. C2 - Internal Natixis 16 The sectors which are further away from competitive neutrality are not necessarily those that might be deem more strategic but rather those which are the bulk of Chinese exports (ICT) and, more recently, autos (electric vehicles). POE>SO E Funding Cost (%) POE<SO E Effective Tax Rate (%) POE<SO E POE>SOE Overall Automobiles Consumer Health Care Industrial Materials Real Estate Renewables Semiconduct ors ICT -35 -25 -15 -5 5 15 25 35 -3 -2 -1 0 1 2 3
  • 17. C2 - Internal Natixis Conclusions 17 Based on China’s case, the link between industrial and trade policy is clear. China is surely not the only case so it would be worth exploring the linkages across different countries. Competition authorities have an important role to play: • Advocating for competitive neutrality at a global scale. • Including foreign subsidies in its competition enforcement cases: • EU’s foreign subsidy legislation is an important example • Also stepping up control for subsidies for foreign acquisitions (US Foreign Merger Subsidy Disclosure Act)
  • 18. C2 - Internal Natixis Disclaimer 18 Disclaimer The information contained in this publication and any attachment thereto is exclusively intended for a client base consisting of professionals and qualified investors. This document and any attachment thereto are strictly confidential and cannot be divulgated to a third party without the prior written consent of Natixis. If you are not the intended recipient of this document and/or the attachments, please delete them and immediately notify the sender. Distribution, possession or delivery of this document in, to or from certain jurisdictions may be restricted or prohibited by law. Recipients of this document are required to inform themselves of and comply with all such restrictions or prohibitions. Neither Natixis, nor any of its affiliates, directors, employees, agents or advisers or any other person accepts any liability to any person in relation to the distribution, possession or delivery of this document in, to or from any jurisdiction. This document has been developed by our economists. It does not constitute a financial analysis and has not been developed in accordance with legal requirements designed to promote the independence of investment research. Accordingly, there are no prohibitions on dealing ahead of its dissemination. This document and all attachments are communicated to each recipient for information purposes only and do not constitute a personalized investment recommendation. They are intended for general distribution and the products or services described herein do not take into account any specific investment objective, financial situation or particular need of any recipient. 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