# Presentation: 168590

## Chinese Economic Planning and the Role of Subsidies

- Usha C. V. Haley, PhD
- Hearing on *China’s WTO Compliance and Industrial Subsidies*
- US-China Economic and Security Review Commission

## Slide 2

- Usha C. V. Haley, Statement before US-China Economic and Security Review Commission

- April 4, 2006

## Outline

- Subsidies: Form and Function of Chinese subsidies
- Squinting through the Chinese Fog: the Lack of Transparency
- Back to the Future: the PRC’s 11th 5-Year Plan
- Who Benefits: Recipients of Subsidies
- Who Profits: the Financial Performance of Multinationals in China

- Usha C. V. Haley, Statement before US-China Economic and Security Review Commission

- April 4, 2006

## Form & Function of Subsidies

- Free to Low-cost Loans
- Asset Injections
- No Break-Even
- Subsidized Purchases
- Beijing’s International Bargaining Power
- Labor Controls
- Tax Breaks & Concessions
- Energy & Land Subsidies
- Sectoral Credit Allocations
- Stock Listings
- Cheap Technology
- Control over Distribution Channels
- Special Market Information
- Undervalued Currency

- Usha C. V. Haley, Statement before US-China Economic and Security Review Commission

- April 4, 2006

## Lack of Transparency

- Reduces ability to gauge true efficiency and productivity of Chinese labor
- Reduces the ability of US manufacturers to prove dumping
- Magnifies the weaknesses of China’s statistical system
- Reduces the credibility of the SOEs’ books

- Usha C. V. Haley, Statement before US-China Economic and Security Review Commission

- April 4, 2006

## Where India Trounces China

- Usha C. V. Haley, Statement before US-China Economic and Security Review Commission

- April 4, 2006

## Lack of Transparency Affects

- Chinese GDP figures
- Statistics Generated by the NSB
- Sensitive Data such as Debt or FDI
- Statistics on Private and Service Sectors
- Some Economic and Industrial Data Classified as State Secrets
- Unemployment Statistics
- Statistics on NPLs

- Usha C. V. Haley, Statement before US-China Economic and Security Review Commission

- April 4, 2006

## 11th 5-Year Plan Indicates that Subsidies will flow into

- Integrated circuits and software
- New generation networks
- Advanced computing
- Biomedicine
- Civil airplane
- Satellite applications
- High-performance and new materials

- Usha C. V. Haley, Statement before US-China Economic and Security Review Commission

- April 4, 2006

## Subsidies to Chinese Industry in the next 5 years will Include

- Controversial sectors including Stem Cells, Gene Therapy and Genetically Modified Crops
- Traditional US-dominated industries including Software, Semi-conductors and Space Exploration
- Emerging technologies including Renewable Energy Sources – Solar, Hydro and Wind power

- Usha C. V. Haley, Statement before US-China Economic and Security Review Commission

- April 4, 2006

## Policies Underpinning Subsidies

- Are Political Rather than Economic and so Promote Exports & Inefficient Domestic Industries
- Are Guided by needs to Control SOEs rather than Increase their Profits
- Stem from Long and Mid-range Plans as well as Mistakes
- Are Generally Very Difficult to Unravel
- Are Clearest for Global Champions
- Are Different at Central, State and Local Levels

- Usha C. V. Haley, Statement before US-China Economic and Security Review Commission

- April 4, 2006

## The Mirage

- Only 1/3rd of the Foreign Companies Operating in China have Ever Made a Profit there
- US Companies operating in China had lower profit margins than in their other global operations
- In 2004, total China earnings for US foreign affiliates including all sources of profits (licensing, royalties) was $8.2b
- In 2004, US foreign affiliates earned $7.1b in Australia (19m people), $8.9b in Taiwan & South Korea (70m people) and $14.3b in Mexico (95m people)
- 5 US companies accounted for 1/3 of equity profits – 3 carmakers (including GM), Yum Brands and McDonalds

- Usha C. V. Haley, Statement before US-China Economic and Security Review Commission

- April 4, 2006

## Successful companies in our research did not rely on Chinese economic and industrial data

*“**You manage by objectives, objectives that must be clearly stated – then determine what kinds of tools you can use to determine if you achieved them, but stick with your objectives. However, if it comes to financial figures, it will be challenging. What good will numbers be if the base rates used for comparison of performance are not reliable.” *
- Elmar Stachels, Bayer, China