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Subsidies, competition and trade – GARCÍA-HERRERO – December 2022 OECD discussion

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Subsidies, competition and trade – GARCÍA-HERRERO – December 2022 OECD discussion

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This presentation by Alicia García-Herrero (Senior Fellow, Bruegel) was made during a discussion on Subsidies, competition and trade at the 21st meeting of the OECD Global Forum on Competition on 1 December 2022. More papers and presentations on the topic can be found out at https://oe.cd/sctr.
This presentation was uploaded with the author’s consent.

This presentation by Alicia García-Herrero (Senior Fellow, Bruegel) was made during a discussion on Subsidies, competition and trade at the 21st meeting of the OECD Global Forum on Competition on 1 December 2022. More papers and presentations on the topic can be found out at https://oe.cd/sctr.
This presentation was uploaded with the author’s consent.

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Subsidies, competition and trade – GARCÍA-HERRERO – December 2022 OECD discussion

  1. 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. 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. 3. C2 - Internal Natixis Why is China relevant? 3 1
  4. 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. 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. 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. 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. 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. 9. C2 - Internal Natixis How big are China’s government subsidies? 9 2
  10. 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. 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. 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. 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. 14. C2 - Internal Natixis How well is competitive neutrality in China? 14 3
  15. 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. 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. 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)
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