QUANTIFYING THE ROLE
OF STATE ENTERPRISESIN INDUSTRIALSUBSIDIESOECD TRADE
POLICY PAPER

June 2024 n°282

OECD TRADE AND AGRICULTURE DIRECTORATE

Quantifying the Role of State Enterprises in Industrial Subsidies
The growing participation of state enterprises in industrial supply chains raises concerns over the
implications for global markets of the subsidies that some of these companies receive. New firm-level
evidence from the OECD MAGIC database shows that state enterprises are relatively larger recipients ofindustrial subsidies than their private competitors. They can also benefit from indirect government support,such as favourable treatment under competition rules and government procurement. Despite theseadvantages, evidence indicates that state enterprises in manufacturing tend to underperform financially.
The report provides unprecedented evidence about the role certain state enterprises play as providers ofsubsidies, such as when providing financing and inputs to other firms at below-market prices. The analysis
concludes by describing the implications of these findings for trade rules and the governance of stateowned enterprises.
Key words:

State-owned enterprises; bank loans; level playing field; market distortions; competition

JEL codes:

F13, F23, H25, H81, O25

Acknowledgements
This report was prepared by Yuki Matsumoto, Chloé Papazian, and Jehan Sauvage of the OECD Tradeand Agriculture Directorate, working under the supervision of David Drysdale and Silvia Gavorníková. An
earlier version of this report also benefitted from the contributions of Ida Vangsgaard Christensen andChristian Steidl. Helpful comments and suggestions were provided by (OECD unless specified otherwise):
Emeline Denis, Luciano Guia, Guy Lalanne, Federica Maiorano, Fabien Mercier, Valentine Millot, Margit
Molnar, Julia Nielson, and Sara Sultan.
The authors would like to thank Brigitte Young for her assistance in formatting this document. The OECD
Secretariat is also grateful for the helpful comments and feedback that delegations and government
officials provided throughout the preparation of this report.

OECD TRADE POLICY PAPER N°282 © OECD 2024

2

Table of contents
Acronyms ................................................................................................................................................. 4
Executive Summary ................................................................................................................................. 5
1. The evolving landscape of state enterprises in industrial supply chains ............................................. 6
2. State enterprises as recipients of industrial subsidies ........................................................................ 92.1. State enterprises tend to obtain more subsidies than their private peers .................................... 92.2. State enterprises can also obtain other, non-pecuniary advantages.......................................... 13
2.3. Despite receiving more government support, state enterprises tend to underperform .............. 21
3. State enterprises as providers of industrial subsidies ....................................................................... 27
3.1. State banks as providers of below market borrowings ............................................................... 27
3.2. Government investment funds as providers of below-market equity and below-market equity
returns ................................................................................................................................................ 35
3.3. State energy utilities as providers of below-market energy ........................................................ 41
4. Implications for trade policy and broader considerations .................................................................. 47
4.1. Can trade rules help address the support provided to and by state enterprises? ...................... 47
4.2. Support to and through state enterprises has broader implications for trade policy but also
the environment ................................................................................................................................. 50
References ............................................................................................................................................ 52
Annex A. The OECD’s MAGIC database .............................................................................................. 57
Annex B. Additional figures and tables .................................................................................................. 59
Annex C. State enterprises can fall outside the scope of competition rules in countries of the Gulf
Cooperation Council .............................................................................................................................. 64
Annex D. Large central state enterprises have emerged in China since 2012 following a
consolidation wave initiated by the SASAC ........................................................................................... 65
Annex E. Mergers conditionally approved in China by the SAMR since 2021 ...................................... 66
Annex F. List of sampled banks covered in Section 3.1.2 of this report ............................................... 67
Annex G. The lack of a harmonised definition of NPLs across countries limits meaningful crosscountry comparisons ............................................................................................................................. 68
Annex H. Overview of the OECD methodology for identifying SEs disciplines in PTAs ....................... 70

FiguresFigure 1. State enterprises account for a growing share of revenue in industrial sectors
Figure 2. State enterprises receive relatively more support than their private competitors
Figure 3. State enterprises face lower risk spreads on their debt
Figure 4. State enterprises are relatively large beneficiaries of below-market energy inputs
Figure 5. Chinese SEs are larger recipients of subsidies than other China-based firms
Figure 6. Profitability tends to decrease with the proportion of government ownership
Figure 7. State enterprises tend to have higher levels of debt relative to their assets
Figure 8. Subsidies may generate a misleading view of firm performance
Figure 9. State enterprises in industrial sectors tend to be less productive
Figure 10. State ownership of banking assets is especially significant in China
Figure 11. The composition of China’s banking assets

7
9
11
12
13
22
23
25
26
28
29

OECD TRADE POLICY PAPER N°282 © OECD 2024

3
Figure 12.
Figure 13.
Figure 14.
Figure 15.
Figure 16.
Figure 17.
Figure 18.
Figure 19.
Figure 20.

Corporate loans to the manufacturing sector are the largest and have recently increased faster 31
The volume and ratio of NPLs for manufacturing loans are higher than the bank-wide ratio andhad been higher than real-estate loans until China’s property crisis
32
The value of total NPLs in China may be considerably higher than the NPL ratio alone would
suggest34
Average lending rates of major banks in China have been slightly above or below the PBOC’s
one-year benchmark
35
The institutional structure of GGFs in principle and in practice40
State power providers generally have had lower returns on assets than private peers
42Firms based in regions known to provide energy subsidies have lower input costs thancompetitors based elsewhere43
Une usine à gaz!: Providers of below-market energy can also be recipients in a complex subsidy
chain
47
PTAs with SE disciplines have increased over time, but remain geographically concentrated
48

Figure A B.1. State enterprises in the sample have grown faster than private peers
Figure A B.2. State enterprises tend to be more leveraged than their private peers
Figure A B.3. Interest coverage appears worse once accounting for subsidies

62
63
63

TablesTable 1

Different types of subsidies affect different elements of companies’ income statements

Table A A.1. Overview of the OECD MAGIC database’s firm sample
Table A B.1. Top 10 sampled companies by revenue (2022) in each key industrial sector covered
Table A B.2. Cement and automobiles are two sectors where government ownership seemingly correlates
positively with financial performance
Table A D.1. Manufacturing M&As in China involving at least one central SE since 2012
Table A E.1. Mergers conditionally approved in China by the SAMR since 2021
Table A G.1. The five-category loan classification system in China

24

57
59
62
65
66
69

Boxes
Box 1.
Box 2.
Box 3.
Box 4.
Box 5.
Box 6.
Box 7.
Box 8.

State enterprises versus state-owned enterprises
Measuring government ownership of industrial firms
Implicit loan guarantees benefitting state enterprises: Some examples from credit-ratingassessments
The state-led consolidation of state enterprises in China
State ownership and influence across China’s banking system are pervasive
China’s ‘special-mention loans’ and the NPL ratio
The ‘in-principle’ institutional design of government guidance funds
Many state-electric utilities have been used to shield end-users from soaring energy prices

OECD TRADE POLICY PAPER N°282 © OECD 2024

6
10
11
15
28
32
38
45

4

Acronyms
AML

Anti-Monopoly Law

BCBSBasel Committee on Banking Supervision

BMB

below-market borrowings

CBIRC

China Banking and Insurance Regulatory Commission

EBIT

Earnings before interest and taxes

FTZ

Free Trade Zone

GCC

Gulf Cooperation Council

GFSEC

Global Forum on Steel Excess Capacity

GGF

Government guidance fund

IEA

International Energy Agency

ITTInternational technology transfers

JV

Joint venture

MAGIC

Manufacturing Groups and Industrial Corporations (database)

MIIT

Ministry of Industry and Information Technology

NDRC

National Development and Reform Commission

NPL

Non-performing loan

PBOC

People’s Bank of China

PTA

Preferential Trade Agreement

PV

Photovoltaic

SAMR

State Administration for Market Regulation

SASAC

State-owned Assets Supervision and Administration Commission

SE

State enterprise

SOE

State-owned enterpriseOECD TRADE POLICY PAPER N°282 © OECD 2024

5

Executive Summary
Many state enterprises (SEs) have become key actors in global manufacturing, with most industrial sectors
featuring one or more SEs in their top 10 companies by revenue. While government ownership is notproblematic in and of itself, a growing concern shared by many countries is where government ownershipallows SEs to operate with certain advantages, distorting the level playing field with private competitors.
Subsidies, direct and indirect, are one major reason why governments are concerned about theparticipation of SEs in industrial supply chains. Drawing on the OECD MAGIC database, available
evidence for 14 key industrial sectors shows that the subsidies firms receive relative to their revenue tend
to increase with the extent of their ownership by the state or state entities. This is particularly the case forgovernment grants and below-market borrowings; corporate-tax concessions seem to benefit all firms
more evenly.
Other, more indirect, forms of government intervention in the market may also favour SEs. This includes,
among others, the non-neutral application and enforcement of competition rules, with evidence to suggestthat SEs may be treated more favourably than private competitors in certain jurisdictions. Other examples
of indirect forms of support for which some evidence exists include discriminatory public procurement rules
and practices favouring domestic SEs in certain sectors and forced technology transfers benefitting or
enabled by SEs.
Despite benefitting from these advantages, data indicate that SEs tend to underperform financially, asassessed by their returns on assets and equity, which often decline with the proportion of company shares
held by state entities. This finding is further underscored by the fact that the profitability of a company isitself affected by subsidies, with most forms of support feeding into higher returns through larger profits
before tax. Removing subsidies would undoubtedly widen the gap in performance between SEs and private
firms.
Crucially, SEs are not just large recipients of subsidies, but can also be providers of support themselves,
such as where they provide inputs to other firms at below-market prices. A prominent case is that of belowmarket borrowings, which usually involves state banks on the provider side, as well as other SEs on therecipient side. Below-market borrowings are particularly prevalent for China-based firms covered in theOECD MAGIC database. Detailed information collected for all top banks in China over the period 2010-22
indicates that corporate loans to the manufacturing sector issued by major state banks have been thesebanks’ largest target sector, while also having one of the largest volumes and ratios of non-performing
loans compared with other target sectors. Together with the finding that average lending rates for majorstate banks in China have been slightly above or below the country’s one-year loan benchmark, this
supports the view that below-market borrowings are a widespread subsidy instrument in China andhighlights the key role of SEs as providers of support.
Alongside the provision of debt on below-market terms, SEs can also be involved in the provision of equity
to industrial companies on favourable terms. This form of support is especially hard to quantify but has
seen growing use in recent years, notably in the semiconductor industry. A further subsidy instrument
involving SEs as providers is the provision of energy inputs on below-market terms, which typically involves
state utilities offering electricity or natural gas to manufacturers at below-market prices. Quantification isagain difficult in this case, but available evidence for selected industrial sectors shows nonetheless thatstate energy providers can act as intermediaries between the government and industrial companies,
shifting the burden of input costs onto other parts of the supply chain.
These findings have important implications for trade policy and the global trading system more generally.
The WTO has to date played a limited role in disciplining the support provided to and by SEs, promptingsome governments to incorporate specific disciplines on SEs in their preferential trade agreements. To
support the emergence of a consensus at the multilateral level, there is a need for sharing more widely
further empirical evidence, as well as the knowledge and experience acquired at the bilateral andplurilateral levels. The involvement of SEs as providers of support calls, in particular, for a rethink ofmultilateral subsidy rules. Viewing government support as an ecosystem in which support flows in multiple
directions and fundamentally reshapes markets poses challenges for approaches based on specifictransfers, but may open the way for more comprehensive solutions to the multiple market distortions
engendered by support to and through SEs.
OECD TRADE POLICY PAPER N°282 © OECD 2024

6

1. The evolving landscape of state enterprises in industrial supply chains
Enterprises in which the state is a significant investor are playing a considerable role in global supply
chains and capital markets. While many of these companies operate in services industries that werepreviously shielded from competition (e.g. banking, energy & utilities, transport, and telecommunications),
several others play leading roles as manufacturers in industrial supply chains and compete internationallythrough cross-border trade and investment. Of the top 10 companies by revenue in different key industrial
sectors covered in the OECD MAGIC database, many have sizable government ownership (Table A B.1).1
With the exception of glass & ceramics, semiconductors, and solar photovoltaic (PV) panels, all othersectors covered feature one or more companies in the top 10 with at least 25% government investment.
State enterprises (Box 1) are thus important actors in manufacturing activities, with their influenceextending well beyond historically state-owned natural monopolies.

Box 1. State enterprises versus state-owned enterprises
Governments can differ in their views of what constitutes a state-owned enterprise (SOE). National
definitions abound but reflect at times conflicting assessments as to whether companies ought to beconsidered state-owned, state-invested, state-controlled, or state-influenced. While recognising thesedifferences, the OECD Guidelines on Corporate Governance of State-Owned Enterprises, which wererevised in 2024, define SOEs as “any undertaking recognised by national law as an enterprise, and inwhich the state exercises ownership or control.”1
More specifically, the Guidelines’ definition of an SOE encompasses:“[enterprises] that are owned and/or controlled by the state. Ownership comprises direct majority
ownership and, provided that control exists, includes other types of direct and indirect ownership.
Control can be exercised if an ownership entity (or several ownership entities acting in concert):••

is the ultimate beneficiary owner of the majority of voting rights; orotherwise exercises an equivalent degree of control.

[…] Conversely, state influence over corporate decisions exercised via bona fide regulation would
normally not be considered as control. Undertakings not covered by the above criteria, and in which
the government assigns voting rights, held indirectly via asset managers or institutional investors
such as pension funds, would also not be considered as SOEs. For the purpose of these Guidelines,
undertakings which are owned or controlled by a government for a limited and well-defined duration
arising out of bankruptcy, liquidation, conservatorship or receivership, would normally not be
considered as SOEs.”
This report follows the definition of the Guidelines but generally refrains from employing the phrase‘state-owned enterprise’ in light of the different meanings that this phrase can carry in different legal
contexts. Instead, the report uses the broader phrase ‘state enterprise’ in accordance with earlier OECD
work undertaken for the Trade Committee (Kowalski and Rabaioli, 2017[1]), unless the discussion
addresses legal definitions of SOEs specifically. As noted in this earlier work (ibid), “[o]wnership, implies
certain interests, rights and obligations characteristic to an owner and thus exertion of influence may
be more likely. It is also directly observable. Yet, it is also clear that ownership is neither necessary forgovernments to influence enterprises’ operations, nor does it inevitably entail such influence.” In what

1

The OECD’s MAnufacturing Groups and Industrial Corporations (MAGIC) database is a confidential firm-level
database of government support in key industrial sectors covering 14 sectors and more than 450 companies over theperiod 2005-22 (wherever possible and applicable). See Annex A for a short description of the database. Government
ownership is here understood as cumulative ownership by government-related entities, including through indirect
horizontal and vertical linkages. Analysis in this report uses 10%, 25%, and 50% as ownership thresholds for
categorising companies. These thresholds are for analytical purposes only and do not seek to pass a judgment on
the extent of state control over companies.

OECD TRADE POLICY PAPER N°282 © OECD 20247
follows, ‘state enterprises’ therefore refers to companies that are owned, invested, controlled, orotherwise influenced by the state, although the ensuing empirical analysis is only able to measurecompanies’ ownership by government-related entities.
While the percentage of ownership is not the sole factor in considering the extent of government control
over companies, large ownership stakes can reveal important linkages between firms and the state.
Analysis in this report uses 10% government ownership as its first government ownership thresholdbecause many firms globally have small stakes (e.g. 2%) held by government-related pension funds for
portfolio reasons.
1. See https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0414.

State enterprises (SEs) are important actors in manufacturing and have come to account for a growing
share of revenue in the different industrial sectors covered (Figure 1). This mostly reflects a tendency for
SEs in the sample to grow faster than their private peers (Figure A B.1), particularly since there have only
been a few acquisitions by SEs of hitherto large private firms in the period considered.2 The growing weightof SEs is especially visible in heavy industries such as steel and aluminium, where firms having 25% ormore government ownership generated nearly half of all revenue among sampled firms in 2022. The paceof increase is, however, faster in sectors where SEs were more modest in size back in 2005. This concerns
especially aerospace & defence, automobiles, cement, rolling stock & signalling, and semiconductors.

Figure 1. State enterprises account for a growing share of revenue in industrial sectors
Total sector revenue by firms’ government-ownership category
Government ownership <10%
Government ownership >=25% & <50%

Government ownership >=10% & <25%
Government ownership >=50%

All MAGIC sectors

Steel & aluminium

100%

100%

90%

90%

80%

80%

70%

70%

60%

60%

50%

50%

40%

40%

30%

30%

20%

20%

10%

10%

0%

0%

Note: See Annex A for more information on the firm sample.
Source: OECD MAGIC database.

2

The semiconductor industry is notably one where state entities have increased their equity participation in somehitherto private companies (e.g. SMIC). Other cases involve large state enterprises acquiring foreign privatecompanies, such as ChemChina acquiring the assets of Swiss company Syngenta in 2017. The faster growth of SEs
may also reflect the fact that countries having sizable SEs have generally grown faster than others in the period
considered.

OECD TRADE POLICY PAPER N°282 © OECD 2024

8Government ownership may not be problematic in and of itself. Concerns are increasingly arising, however,where government ownership enables SEs to operate with substantial advantages, thus distorting the levelplaying field with private competitors. These advantages can include direct and indirect support fromgovernment owners, government owners tolerating lower returns on their equity, or granting them morefavourable treatment in terms of the wider regulatory environment. Earlier OECD efforts to identify andquantify government support in industrial sectors 3 have also found certain SEs to act as providers of
support or policy intermediaries themselves. This can involve state banks offering loans to industrial
companies at below-market rates (OECD, 2021[2]) or other in-kind or below-market inputs, such as stateutilities selling electricity to manufacturing plants at below-cost tariffs (OECD, 2023[3]).
Several countries have expressed concerns about the possible trade and competition implications of thegrowing role of SEs in global supply chains. Most recently, G7 Leaders, in their Statement on Economic
Resilience and Economic Security of 20 May 2023 in Hiroshima, noted their “renewed concerns aboutcomprehensive strategies to use a range of non-market policies and practices such as pervasive, opaque,and harmful industrial subsidies, market distortive practices of state owned enterprises, and all forms offorced technology transfers” (own emphasis).4 On 8 June 2023, Ministers and high-level representativesof participants to the Global Forum on Steel Excess Capacity stated “that much of the investment in new[steel] capacity, including by state-owned enterprises, has the potential to produce significant volumes ofsteel, thereby worsening the excess capacity problem and raising the risk of a global steel crisis” (ownemphasis).5 Finally, the EU-US Trade and Technology Council Inaugural Joint Statement of
29 September 2021 mentioned the aim of participants to “share information on non-market distortive
policies and practices”, notably “market-distorting industrial subsidies, including support given to andthrough SOEs, and all other types of support offered by governments; […] and anti-competitive and nonmarket actions of SOEs”6 (own emphasis).
These and similar concerns are also related to the notion of ‘competitive neutrality’, which the OECD
defines as a principle according to which all enterprises, public or private, domestic or foreign, face thesame set of rules, and where government’s contact, ownership or involvement in the marketplace, in fact
or in law, does not confer an undue competitive advantage on any actual or potential market participant.
The OECD Recommendation on Competitive Neutrality 7, adopted in May 2021, provides the mainprinciples that governments should follow in order to ensure competitive neutrality is maintained between
state-owned and privately-owned enterprises, between different privately-owned enterprises, and between
domestic and foreign enterprises. Additionally, the revised OECD Guidelines on Corporate Governance ofState-Owned Enterprises aim to address, among other things, possible concerns arising from market
distortions caused by SOEs and to support the goal of a level playing field in the market.
The present report seeks to help inform these various discussions by offering empirical evidence regarding
the support that SEs receive from governments and which they provide to other industrial firms. The
findings in this report could help inform efforts in the OECD and elsewhere to craft better rules andstandards laying the foundation for a level playing field between SEs and their private peers, and to monitor
progress toward that goal.

3

This refers to firm-level work undertaken for the OECD Trade Committee and summarised in OECD (2023[5]).
Other OECD projects are also addressing the issue of industrial policy at the country or sector level but do notlook specifically into the role of state enterprises (Criscuolo, Lalanne and Díaz, 2022[59]) (Mercier and Giua,2023[60]).
4

See www.mofa.go.jp/files/100506843.pdf (accessed on 27 June 2023).

5

See www.steelforum.org/events/gfsec-ministerial-statement-june-2023.pdf (accessed on 27 June 2023).

6Seehttps://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_21_4951
22 February 2024).

(accessedon7

See https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0462 (accessed on
22 February 2024).
OECD TRADE POLICY PAPER N°282 © OECD 20249

2. State enterprises as recipients of industrial subsidies
2.1. State enterprises tend to obtain more subsidies than their private peers
Subsidies, direct and indirect, are one major reason why governments are concerned about theparticipation of SEs in industrial supply chains. To the extent that SEs obtain more support than theirprivate peers, this could constitute an important source of distortions to competitive neutrality, markets,and trade. Subsidies may, for instance, enable recipients to increase their market share by offering lower
prices or by acquiring their competitors. They may also allow structurally loss-making companies to evadefinancial constraints and remain commercially active, which could in turn affect wider market outcomes(e.g. by depressing prices). In a world of global value chains and integrated economies, these possible
impacts are unlikely to be confined to any one country and therefore matter for international trade,investment, and the rules that guide them (IMF et al., 2022[4]; OECD, 2023[5]).
Available evidence for 14 key industrial sectors shows that SEs receive relatively more support than theirprivate competitors. Data drawn from the OECD MAGIC database (Annex A) indicate that the subsidies
firms receive relative to their revenue tend to increase with the extent of their ownership by state entities(Figure 2; left) (Box 2). This generally holds true for government grants and for below-market borrowings.
In the case of income-tax concessions, firms having between 25% and 50% government ownership appear
to obtain the most support, followed by firms having less than 10% government ownership. The lower
proportion of tax concessions for firms having 50% or more government ownership is partly due to thesefirms operating in sectors less targeted by R&D and investment incentives, such as heavy industries.
Overall, however, firms having less than 25% government ownership receive relatively less support thanother firms covered in this study.

Figure 2. State enterprises receive relatively more support than their private competitors
Subsidies in 14 key industrial sectors(% of firm revenue over 2005-22)

Sampled firms by government-ownership category
Government ownership <10%
Government ownership >=10% & <25%
Government ownership >=25% & <50%
Government ownership >=50%

GrantsIncome-tax concessions
Below-market borrowings
3.0%
2.5%

Other

2.0%

OECD

1.5%
India

1.0%

GCC

0.5%
0.0%

Government
ownership <10%

Government
Government
ownershipownership>=10% & <25% >=25% & <50%

Government
ownership
>=50%

China

0%

20%

40%

60%

80%

100%

Note: See Annex A for more information on the firm sample.
Source: OECD MAGIC database.

Government ownership of large industrial firms is not evenly split across jurisdictions, with the People’s
Republic of China (hereafter “China”) and countries of the Gulf Cooperation Council (GCC) 8 possessing
relatively more SEs among the sampled firms covered (Figure 2; right). Many governments retain
ownership stakes in resource extraction firms or in large services providers in network industries, such as
power generation and transmission (e.g. EDF, Hydro Québec, and the Tennessee Valley Authority), airand rail transport (e.g. Air New Zealand, Deutsche Bahn, and the Korea Railroad Corporation), postal
services (e.g. Australia Post, Correos de Chile and Japan Post), or telecommunications (e.g. Telenor and8

Member countries of the GCC are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

OECD TRADE POLICY PAPER N°282 © OECD 2024

10 
Telia). In manufacturing industries, however, large government stakes are less common and concentrated
in a few jurisdictions. This explains why the discussion in this report has a relatively large focus on China
and GCC countries. It also explains why there is significant overlap between the finding that SEs obtain
relatively more support and the finding that firms based in China are relatively large beneficiaries (OECD,
2023[5]).

Box 2. Measuring government ownership of industrial firms
Government ownership of firms should not be approached in a binary fashion but rather as a continuum,
ranging from firms with zero government ownership to firms in which governments hold all shares. The
extent to which governments own industrial firms is in that sense an empirical question, which requires
access to information on the ownership structure of companies. This is the approach taken in this report,
where detailed information on large shareholders was collected for each firm covered (Annex A),
allowing government ownership to be approached factually and quantitatively.
While it can be relatively easy to distinguish private firms from companies that are directly owned bygovernments through dedicated government agencies (e.g. the French Agence des participations del'État or the Chinese State-owned Assets Supervision and Administration Commission [SASAC]), there
can be difficult cases where government ownership occurs through indirect horizontal and verticallinkages involving other SEs as owners or chains of shell entities serving as intermediaries between
government bodies and the companies they own. This is particularly the case where ownership of acompany is split between different government-related entities (including at different levels ofgovernment), and where each of them owns enough shares to be deemed a major shareholder but notenough to exercise majority control on their own. It is important in this case to consider the cumulativeownership resulting from the addition of shares owned by different government-related entities.
In such situations, lack of transparency about the identity of shareholders and their beneficial owners
can hinder understanding of the role of governments in markets, complicate efforts to discipline thebehaviour of SEs, and further worsen opacity around the scope and scale of government support.
Moreover, while the above only concerns government ownership, it is not the only dimension along
which government can exert influence over companies. Additional consideration may need to be given
to the composition of boards, the existence of golden shares, or other relevant factors.
SEs tend to face lower risk spreads on their debt, consistent with the fact that they obtain more belowmarket borrowings (Figure 3). This can be seen by subtracting lending base rates 9 from the average
effective rates of interest on borrowings that firms incur. The resulting numbers ought to provide a measureof how debt providers perceive the idiosyncratic risk involved in lending to these companies. There aremany reasons for firms to face different spreads (indebtedness, profitability, etc.), as reflected in their credit
ratings, but the gap is particularly stark between firms having less than 10% government ownership, forwhich average spreads reach about 300 basis points, and those having more than 50% government
ownership, for which average spreads are negative. Moreover, the higher spreads observed for firms withless than 10% government ownership do not appear to stem from higher levels of outstanding debt on theirbalance sheets. To the contrary, debt-asset ratios are on average higher for majority state-owned
companies. These findings are suggestive of the possible presence of subsidised lending and implicit loan
guarantees built on the assumption of government backing for government-owned companies (Box 3).

9The lending base rates used in the analysis are weighted averages accounting for the different currencies in whichfirms borrow. This reflects the fact that base rates can vary a lot across countries and currencies. The base rate for afirm borrowing 60% in USD and 40% in EUR would, for example, be a 60-40 average of the LIBOR (pre-2023) andthe EURIBOR, respectively.

OECD TRADE POLICY PAPER N°282 © OECD 2024 11Figure 3. State enterprises face lower risk spreads on their debt
Left axis: average corporate spreads in basis points; right axis: average debt-asset ratio
Corporate spreads

Debt-asset

350

0.35

300

0.30

250

0.25

200

0.20

150
0.15

100

0.10

50

0.05

0
-50

Government ownership <10%

Government ownership >=10% &<25%

Government ownership >=25% &<50%Government ownership >=50%

0.00

Note: The data behind this graph cover the entire period 2005-22. See Annex A for more information on the firm sample.
Source: OECD MAGIC database.

Box 3. Implicit loan guarantees benefitting state enterprises: Some examples from credit-ratingassessments• Fitch Ratings on China Baowu (steel), 20 February 2023: “We assess Baowu's status,
ownership and control as 'Strong' due to the company's high strategic importance to the state.
Baowu is fully owned by China's SASAC, which exerts control over the company's board andsenior management, and has strong influence over the group's major strategies and investment
decisions. […] We assess Baowu's support record as 'Very Strong', as the state provided
significant support during its creation in 2016 with the merger of Baosteel Group Corporation and
Wuhan Iron and Steel Group. This helped Baowu quickly deleverage and become China's largest
auto-sheet and silicon steel producer, with a market share of 60% and 80%, respectively. […]Baowu's ratings are equalised with China's sovereign rating under Fitch's [Government-Related
Entities] criteria. Its support score is comparable with that of other centrally owned flagship SOEs
in other sectors, such as CRRC Corporation Limited (A+/Stable) and Aluminum Corporation ofChina (A-/Stable). […] Fitch has raised Baowu's [Standalone Credit Profile] to 'bbb+' from 'bbb',
to reflect our expectation that the company will sustain its net leverage below 1.7x from 2023
onwards.”• Moody’s on State Power Investment Corporation (SPIC; power generation & aluminium
smelting), 21 July 2020: “SPIC's A2 issuer rating combines its Baseline Credit Assessment(BCA) of ba2 and a six-notch uplift based on the very high likelihood of support from, and the very
high dependence on the Government of China (A1 stable), under Moody's Joint Default Analysis
approach for government-related issuers. The six-notch uplift is based on Moody's expectation ofa very high likelihood of central government support, based on SPIC's high systemic importanceas one of the nation's major electricity suppliers, and its full ownership and direct supervision by
the central government, with a strong track record of government support.”• Moody’s on Airbus (aerospace & defence), 9 April 2020: “Airbus' A2 rating continues toincorporate one notch of uplift from the company's a3 standalone Baseline Credit Assessment(BCA), given the strategic ownership stake of France (11%) and Germany (via a subsidiary of
Kreditanstalt für Wiederaufbau - KfW, 11%), in accordance with our Government-Related Issuers(GRI) rating methodology.”

OECD TRADE POLICY PAPER N°282 © OECD 2024

12 
• Moody’s on Hydro (power generation & aluminium smelting), 28 March 2019: “While
Moody's classifies Hydro as a Government Related Issuer in view of its 34.3% ownership by the
Norwegian government (Aaa stable), the Baa2 rating does not incorporate any uplift as a resultof the government ownership, which reflects Moody's assumption of 'low' governmental support
in a distress scenario.”
Source: Fitch Ratings and Moody’s.

Earlier OECD work has found that SEs in heavy industries are relatively large recipients of support in theform of energy inputs obtained at below-market prices (OECD, 2023[3]). Quantifying the support conferredthrough below-market energy inputs is particularly hard, time-consuming, and data-demanding due to lackof transparency over the quantities and prices of energy carriers exchanged between state energy
companies and their industrial customers. For this reason, the OECD has not been able to cover allcompanies represented in the OECD MAGIC database. Using an illustrative sample of 33 large industrial
groups operating in aluminium smelting, steelmaking, cement, and chemicals, this earlier work found,nevertheless, SEs to be relatively large beneficiaries of below-market energy inputs (Figure 4; left).
Between 2010-20, the 25% of sampled firms that obtained the highest amount of below-market energy(i.e. the fourth quartile) were, for instance, 65% owned by government entities on average. Many of thesefirms are based in GCC countries, a region where the IEA estimates fossil-fuel subsidies to be very large(Figure 4; right).10

Figure 4. State enterprises are relatively large beneficiaries of below-market energy inputs
Below-market energy, % of estimated energy costs

Government ownership by quartile of below-market
energy (high est.)
70%

Low estimate

High estimate

250%

60%

50%

200%

40%

150%

30%

100%

20%
50%

10%
0%

0%

First quartile

Second quartile

Third quartile

Argentina China

Fourth quartile

Egypt

GCC

OECD

RussiaSouth
AfricaNote: Quartiles of below-market energy are defined such that the first (fourth) quartile comprises the 25% of firms that receive the lowest (highest)
relative amount of below-market energy in the sample. While the graph on the left-hand side is based on the upper bound of the OECD’s
estimates for below-market energy, using instead the lower bound does not change the findings of this graph.
Source: OECD (2023[3]).

The OECD MAGIC database (Annex A) provides first-of-its-kind cross-country data on the ownership ofindustrial companies and the subsidies they receive. Outside of the work of the OECD, the empiricalliterature on industrial subsidies benefitting SEs is, to date, limited. Existing studies tend to focus on specificcountries or sectors, with many looking at China. Using a large sample of medium and large enterprises in
China between 1998 and 2007, Aghion et al. (2015[6]) found, for example, that “[p]ublic sector enterprises
were more likely to receive subsidies and tariff protection, but less likely to receive tax holidays.” Usingsimilar data but for a longer period covering up to 2013, Harrison et al. (2019[7]) identified SOEs as theforemost recipients of “low interest loans and government subsidies.” For the period 2012-15, Cheng et
10

See www.iea.org/topics/energy-subsidies (accessed on 22 February 2024).

OECD TRADE POLICY PAPER N°282 © OECD 2024 13
al. (2019[8]) noted, for their part, that “SOEs and politically connected firms [in China] appear more likely toreceive innovation subsidies.” On the question of subsidised loans more specifically, Poncet et al. (2010[9])found SOEs to be less financially constrained than private firms in China, while Ru (2018[10]) has shownthat China Development Bank’s industrial loans to SOEs tended to “crowd out private firms in the same
industry but crowd in private firms in downstream industries.” While the above does not aim to provide acomprehensive overview of the literature, it shows, nevertheless, that this report’s finding that SEs
generally obtain more subsidies is not isolated nor unprecedented.
While the finding that SEs obtain relatively more subsidies stems partly from China’s larger use ofgovernment support in manufacturing and its widespread government ownership of companies, it isimportant to note that Chinese SEs are also large recipients of subsidies relative to other firms based in
China (Figure 5). This is consistent with the findings of the studies cited above, some of which point to thefavoured access that Chinese SEs have to loan financing from state banks. 11 In addition to being an issue
for trading partners, the question of competitive neutrality is therefore also one for these companies’
operations in their domestic markets.

Figure 5. Chinese SEs are larger recipients of subsidies than other China-based firms
Subsidies within China by SE category (% of revenue)
GrantsIncome-tax concessions

Below-market borrowings

4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%

Government ownership <10%

Government ownership >=10% &<25%

Government ownership >=25% &<50%Government ownership >=50%

Note: The data behind this graph cover the entire period 2005-22. See Annex A for more information on the firm sample.
Source: OECD MAGIC database.

2.2. State enterprises can also obtain other, non-pecuniary advantages
While manufacturing SEs are relatively large recipients of subsidies, there are other, more indirect formsof government intervention in the market that can also favour SEs. These non-pecuniary forms of support
generally involve transfers induced by the regulatory regime and its enforcement in areas such ascompetition law, public procurement, or bankruptcy law that provide more favourable treatment orprotection to domestic firms. Given the large presence of SEs in industrial sectors (Figure 1 andTable A B.1), guaranteeing a competitively neutral regulatory environment amongst companies engaged
in manufacturing is crucial to maintain a level playing field and avoid trade distortions.

2.2.1. State enterprises and the non-neutral application and enforcement of competition rules
As much as private enterprises, SEs may have an incentive to engage in anti-competitive behaviour, witha view to gaining or holding market power, or protecting a monopoly position. For instance, in raisingbarriers to entry and foreclosing rivals, or in concentrating their activities to become a dominant player ina given market, SEs may restrict competition and, ultimately, reduce market efficiency and consumer
11

This issue is discussed in more detail in the next section of the report.

OECD TRADE POLICY PAPER N°282 © OECD 2024

14 
welfare. The advantages and privileges SEs may enjoy, such as government support, softer budget
constraints, or the perception of government protection, may amplify their incentive and ability to engage
in, and sustain such anti-competitive conduct [DAF/COMP/GF(2018)10].
Guaranteeing competitive neutrality by ensuring that all firms can compete on their own merit, regardlessof their ownership, nationality, or legal form is key to maintaining a level playing field and preventing
distortions of competition.12 According to the OECD Recommendation on Competitive Neutrality(henceforth ‘the OECD Recommendation’), this implies that “countries should adopt or maintain, as
appropriate, a competitively neutral competition law that address anti-competitive conduct and includes
merger control”, as well as apply the same procedural rules and sanctions to all market players.13 This
report next analyses competition rules and decisions adopted across different jurisdictions, as well as
empirical evidence, to examine whether the scope of application of certain national competition laws andtheir enforcement prejudice the principle of competitive neutrality by privileging SEs, to the detriment offoreign, private enterprises. This analysis focuses by necessity on jurisdictions where state ownership ofindustrial assets is more common, and thus more at risk of significantly affecting trade and competition in
manufacturing.

Competition rules apply to both state and private enterprises in the majority of jurisdictions worldwide,
although a few exceptions remain
Most jurisdictions have enacted competition rules applying to both state and private enterprises. National
competition laws may at times explicitly provide that they apply to all legal entities, public or private, whileothers may specify that they apply to all undertakings defined as “any entity engaged in an economic
activity, regardless of its legal status and the way in which it is financed.”14 National competition authorities
and tribunals have ruled on many occasions against the anticompetitive conduct of SEs, upholding theprinciple that their national competition legislation applies to both private enterprises and SEs. This welldeveloped jurisprudence from both OECD and non-OECD countries has thus far overwhelmingly
concerned SEs in services sectors as many governments retained ownership stakes in large services
providers in network industries following privatisation. In some instances (e.g. China and the European
Union), competition authorities have also found that both cartel and merger rules apply to SEs, even where
both companies involved have state ownership.15
In contrast to the apparently neutral scope of application of many national competition legal frameworks,
some jurisdictions, notably countries of the GCC, long maintained or continue to maintain some forms of
exemptions, excluding companies owned or controlled by the state from the reach of their competition laws
(Annex C). Although these exemptions may predominantly concern national utilities, which remain largely
under the ownership or control of the state, they may also benefit important manufacturing SEs that also
form part of the industrial landscape of these countries, notably in chemicals, fertilisers, and cement.

12

See https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0414.

13

See https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0462.

14

C-41/90 Höfner and Elser v Macroton, EU:C:1991:161. The concept of ‘economic activity’ refers to “any activity
consisting in offering goods or services on a given market,” irrespective as to whether it is profit-making oriented.
15

In certain jurisdictions, rules on merger control may apply to two companies that are majority-owned or controlled
by the same SE or by the same private enterprise if, prior to the concentration, they acted independently on the market,
pursuing a separate commercial conduct and commercial policy. On the contrary, should the two companies ownedby the same SE or the same private enterprise not have an independent power of decision prior to the concentration,
the operation will be regarded as an internal restructuring. See, for instance, the EU rules on merger control,
Section 1.7 of the Commission Consolidated Jurisdictional Notice under Council Regulation 139/2004/EC on thecontrol of concentrations between undertakings, 16 April 2008, OJ C 95/1 and Recital 22 of Council Regulation
139/2004/EC of 20 January 2004 on the control of concentrations between undertakings, OJ L 24/1.
OECD TRADE POLICY PAPER N°282 © OECD 2024 15Competition rules may not always be enforced equally against state and private enterprises – A case studyof merger-control assessment in China
While competition rules may appear de jure competitively neutral, their enforcement may de facto
discriminate against private enterprises by affording more favourable treatment for SEs, including inmerger control or antitrust enforcement. Unfair enforcement of competition law can result in cartel-likebehaviour by SEs, abuse of dominant position by SEs, or anti-competitive behaviour of a SE following amerger, and can thus significantly distort the level playing field. For this reason, the OECD
Recommendation says that competitive neutrality should extend to the enforcement of competition law bycompetition authorities.
Ex ante review by the Chinese competition authority of state-led mergers and acquisitions between andby SEs in China provides an example of where a national competition authority may have treated domestic
SEs more leniently than private firms. China’s push to consolidate its SEs over the past decade has
resulted in the emergence of very large domestic SEs, which now compete internationally in sectors suchas chemicals, shipbuilding, steel, and rolling stock (Box 4 and Annex D). While these mergers andacquisitions (M&As) were – as would be the case for private companies – notified to the State
Administration for Market Regulation (SAMR), China’s competition authority, only one transaction involving
a central SE16 was not cleared unconditionally, despite the consolidations leading to a single SE in manycases. All prohibited mergers (3) and mergers approved subject to remedies (59) in China concerned
private enterprises only, with two exceptions.17 Most of these conditional decisions also involved at least
one foreign firm.18 Indeed, it is not uncommon for the SAMR to impose remedies to mergers involving
private foreign enterprises whereas other jurisdictions unconditionally clear the same transactions. As an
illustration, 9 of the 13 concentrations with conditions in China since 2021 – which mainly involved privatecompanies active in manufacturing, notably in semiconductors – fulfilled the merger thresholds in otherjurisdictions and thus were also reviewed by these other jurisdictions. Of these nine transactions, only
three were also approved conditionally by these other jurisdictions while the rest were approved
unconditionally (Annex E).
In conclusion, the evidence reviewed above may be suggestive of an imbalance between the treatment
under Chinese merger control of private, notably foreign, companies, on the one hand, and SEs on theother. Although merger control in China de jure applies to both state and private enterprises, this apparent
imbalance may have allowed the emergence of very large domestic SEs, with possible implications for
global markets.

Box 4. The state-led consolidation of state enterprises in China
Since China’s State Council created the SASAC as the authority overseeing central SEs in 2003, theconsolidation of SEs within specific sectors through M&As has increased significantly. The
phenomenon accelerated after 2006, following the announcement by the SASAC that the central
government would endeavour to maintain full control of seven strategic industries via central SEs andexert influence via central SEs in other less strategic, albeit important, industries (Owen, Sun andZheng, 2008[11]; Zheng, 2023[12]).1 Merger-driven SE consolidation gained further momentum following
the ‘Made in China 2025’ initiative, published in May 2015, with the goal of nurturing companies able tocompete with global manufacturing leaders (Song, 2018[13]; O’Connor, 2019[14]; Lardy, 2019[15]). It was

16

Central SEs refer in China to enterprises owned and administered by the SASAC at the national level.

17

The SAMR issued two decisions in, 2022 and 2023 respectively, approving conditionally concentrations involving
SEs: the planned joint venture between a local SE, Shanghai Airport Authority and Eastern Air Logistics, whose
beneficial owner is China Eastern Airlines, a central SE that is majority-owned by the SASAC, and the envisaged
concentration between two local SEs, namely Wanhua Chemical and Yantai Yongli.
18

The numbers above are based on the authors’ own research drawing on the publication by the SAMR ofconcentrations conditionally approved, www.samr.gov.cn/fldes/tzgg/ftj/index.html (accessed on 24 February 2024)
and https://globalcompetitionreview.com/guide/the-guide-merger-remedies/fifth-edition/article/china-recent-remedycases-showcase-impact-of-amended-anti-monopoly-law (accessed on 16 February 2024).

OECD TRADE POLICY PAPER N°282 © OECD 2024

16 
then further advanced by the government’s policies in the context of the 14th Five-Year Plan (2021-25),
aimed at supporting the merger, acquisition, and reorganisation of state-owned capital in strategicallyimportant industries.2
As a result of this consolidation wave, the number of central SEs was reduced from 189 in 2003 to 97
in November 2023 (Zheng, 2023[12]).3 Major central SEs have emerged in the last years in various
industrial sectors, be it through mergers of central SEs or through acquisitions by central SEs of local
or smaller central SEs. Between 2012 and August 2022, there were 22 M&As either involving a central
SE or leading to the creation of a central SE in pivotal industrial sectors, such as steel, aluminium,
rolling stock, shipbuilding, or rare earths (Annex D). Nine of these transactions took place in the steel
sector. In two of these mergers, i.e. the merger between China CNR Corp. and China CSR Corp. (rollingstock) and the merger between China Shipbuilding Industry Co. and China State Shipbuilding Corp
(shipbuilding), the SASAC re-merged companies it had previously broken up (Zheng, 2023[12]; OECD,
2023[16]).
Today, large central SEs resulting from this consolidation wave, such as China Railway Rolling Stock
Corporation (CRRC), Chalco, China Baowu Group, China National Building Material (CNBM), China
Shipbuilding (CSSC), and China Rare Earths are all the largest companies globally by sales in theirrespective sectors.
1. SASAC, Guidance on the Restructuring of State Capital and SOEs (18 December 2006). The seven so-called strategic industries included
national defence, electrical power generation and grids, petroleum and petrochemicals, telecommunications, coal, civil aviation, andwaterway transportation while the other important industries concerned automobiles, steel, and technology.
2. See www.sasac.gov.cn/n2588025/n2588139/c15887785/content.html?jump=false (accessed on 19 March 2024).
3. See www.sasac.gov.cn/n2588045/n27271785/n27271792/index.html (accessed on 23 February 2024).

2.2.2. State enterprises and discriminatory public procurement rules and practices
Ensuring that government procurement does not involve discriminatory practices favouring SEs is anotherimportant dimension of competitive neutrality. Government procurement plays an important role in someof the sectors covered by the OECD MAGIC database (Annex A), particularly rolling-stock, aerospace,telecommunications network equipment, and renewable energy equipment, where government entities or
SEs are often important buyers.19 Instances where public procurement legislation or its implementation
favours specific types of players, such as SEs or national incumbents, can hinder market access, distortcompetition, and, in turn, limit consumer choices, increase prices, as well as impede tendering processes
aimed at helping achieve better value for money. In this context, many OECD countries view it as importantthat government procurement processes follow open, fair, non-discriminatory, and transparent conditions,so that procuring entities, including SEs, allow all potential suppliers to participate in public tenders, andall bidders are treated equally, regardless of their ownership, legal form, nationality, or origin of goods.20
While there has been significant progress across countries in opening up public markets to foreigncompetition, notably promoted by national legislation regulating public procurement, as well as bymultilateral and plurilateral trade agreements, discriminatory procurement measures and practices stillpermeate public procurement processes. However, documenting such measures and practices is a difficult
exercise, not least because discrimination can occur even in the absence of explicit rules favouring de jureor de facto specific suppliers, and instead result from implicit policies and customs. Although the OECD
has recently assessed the extent of discrimination taking place through government procurement in therolling-stock sector (OECD, 2023[16]), this exercise cannot be easily replicated as it depends on whether

19

Public transport authorities at the state, regional, or municipal levels are often the principal buyers of rolling stock.
Several national airlines or telecommunication operators have also remained state-owned, -controlled, or -invested.
Likewise, government ownership of electric utilities, often in charge of developing renewable energy parks, remains
significant worldwide.
20

The subsidies that certain bidders (including SEs) receive from governments may, however, distort competition ingovernment procurement, requiring further action to maintain a level playing field. This forms the rationale behindsome provisions of the EU’s Foreign Subsidy Regulation, which entered into force in July 2023. See
https://competition-policy.ec.europa.eu/foreign-subsidies-regulation_en (accessed on 24 May 2024).

OECD TRADE POLICY PAPER N°282 © OECD 2024 17
the supplier or the procuring entity disclose procurement contracts they have been awarded or haveawarded.
Discriminatory government procurement rules may at times provide explicit, de jure preferential treatment
to domestic SEs, notably in sectors where, in a given jurisdiction, one or several SEs are the exclusive
provider of goods or services (OECD, 2021[17]). Often, however, governments adopt discriminatory rules
through, for instance, market access restrictions to protect domestic firms from foreign competition,
irrespective of their ownership. Market access restrictions discriminating between foreign and domestic
firms could, nevertheless, effectively favour SEs in cases where SEs are dominant in a sector domestically.
In other words, absent a de jure, textual discriminatory provision against private enterprises, circumstantial
factors, such as the presence of SEs within the domestic sector, their domestic market share, their past or
present role and status, and more broadly, the government’s industrial policy strategy may prove relevantin evaluating the advantage that government procurement may provide to SEs. Identifying such cases isunderstandably difficult, particularly where discrimination results from informal government policies andpractices, as well as tacit conduct not codified in written rules (Gourdon and Messent, 2017[18]). In thiscontext, finding evidence of de facto preference for SEs in government procurement mainly relies on wider
contextual factors.

The case of rolling stock
The challenge of finding evidence of de facto preference for SEs in government procurement can beillustrated using the rolling-stock sector. Earlier OECD work has shed light on the existence of de jurediscrimination between domestic and foreign firms and on the difficulties involved in detecting de facto
discrimination (OECD, 2023[16]). Several countries, including India, Türkiye, and the United States, have
explicit local content requirements affecting purchases of rolling stock by their public railway companies(ibid). This can lead foreign manufacturers (e.g. Alstom or Hitachi) to establish a local production base toserve the local market.
Fewer countries have systematic market access restrictions in procurement, which effectively foreclose
foreign rolling-stock manufacturers from entering the market altogether. This is the case for China, where
stringent restrictions on procurement have long favoured the country’s two state-owned manufacturers ofrolling-stock and signalling equipment, CRRC and CRSC. In practice, only Chinese majority-owned
companies holding the full ownership of intellectual property rights required for the project’s execution mayreportedly bid for rolling stock tenders.21 Where foreign firms wish to participate in a tender, they need to
be in a joint venture with local companies, but they cannot have the controlling share. Additionally, it
appears that companies must have a state-issued license to participate in rolling-stock tenders. In theabsence of pre-defined criteria, however, such licenses are seemingly only granted to Chinese-controlled
companies.22 In this situation, the combination of stringent market-access restrictions with two SEs holding
a quasi-monopoly on the production and supply of rolling stock and signalling results in privileging SEs
over private, foreign enterprises.
A key actor in the allocation of these procurement contracts is the China Railway Corporation, another SE.
Over 2014-22, CRRC earned on average 45% of its revenue from the China Railway Corporation. 23
Likewise, CRSC has reported on several occasions 24 that the majority of the Group’s customers are China
Railway Corporation and its affiliated entities, specifying that “any temporary change in the tendering andbidding plans of China State Railway Group” may adversely affect its business development. Thisillustrates that state procuring entities, to the extent they favour domestic companies in the selection of
their suppliers, may also confer support to companies upstream.25 In that sense, state procuring
enterprises downstream can be the implementing agents of discriminatory policies, hence acting as
intermediaries between the government and domestic suppliers. In such instances, however, absent
21

Case M.8677, Siemens/Alstom, para 129.

22

ibid, paras 108 and 129.

23

Authors’ calculation based on the annual reports of CRRC between 2014 and 2022.

24

See CRSC’s 2019 annual report.

25

See the next section of this report, which concerns the issue of SEs as providers of support.

OECD TRADE POLICY PAPER N°282 © OECD 2024

18 
explicit public-procurement rules discriminating between domestic and foreign companies ormarket-access restrictions having such an effect, it remains very difficult to document preferential treatment
by state procuring entities of domestic (state) enterprises.

The case of telecommunications network equipment
Telecommunications network equipment is another sector where public procurement crucially influences
the structure of the sector. As in rolling stock, the role and conduct of telecommunication operators as
procuring entities can shape the domestic market for telecommunications equipment. And as in rollingstock, the little evidence there is generally points to the role played by China’s state telecom operators,
namely China Telecom, China Mobile, and China Unicom.26
China’s state telecommunication operators, notably China Telecom and China Unicom, appear to be
encouraged through a two-tiered fee system to prefer domestic telecommunication equipment
manufacturers as their suppliers. Procurement of the three telecommunication operators in the country
mostly takes place through the companies’ centralised procurement, which they publish on an annual orbiennial basis.27 In the case of China Telecom and China Unicom, centralised procurement services are
performed by the state-owned parents, i.e. China Telecommunications Corporation and Unicom Group. 28
Both China Telecom and China Unicom have consistently reported in their annual reports that they must
pay a concession fee to their parents in exchange for these procurement services. The amount of theconcession fee to be paid nonetheless differs according to the origin of the telecommunication equipment.
While the concession fee for the procurement of imported equipment cannot exceed 1% of the contract
value, the two subsidiaries must pay a maximum concession fee of 3% of the contract value for the
procurement of domestic equipment.29 As a result, when the parent groups (China Telecommunications
Corporation and Unicom Group) award a purchase contract to a domestic manufacturer oftelecommunication equipment, China Telecom and China Unicom must transfer a fee to their parents thatis three times higher than that which would apply for the purchase of imported equipment. As the parent
entities responsible for organising the procurement of their subsidiaries, China Telecommunications
Corporation and Unicom Group are incentivised to choose domestic, instead of imported, equipment.
This mechanism may have the effect of discriminating between domestic and foreign telecommunicationequipment, hence possibly offering Chinese manufacturers, namely Huawei and state-invested ZTE, aprotected home market. The fact that preference may be given to domestic over imported
telecommunication equipment in China may be corroborated by the predominance of local suppliers in thecentralised procurement, which China Telecom and China Unicom have disclosed in their corporate
sustainability reports.30 Moreover, the extent of telecommunication equipment installed within China that

26

There have been allegations, for example, that informal guidance of the central government in the mid-2000s
induced China’s state telecom operators to allocate no less than 70% of their 4G orders to the two domestic companies
producing telecommunication equipment, Huawei and ZTE (Kratz and Oertel, 2021[65]).
27

As an example, China Unicom has reported in recent corporate social responsibility reports the percentage of its
centralised procurement. For the period 2019-21, procurement of China Unicom taking place through its centralised
procurement exceeded 90%, even amounting to 96.7% in 2021.
28

In this respect, China Unicom acknowledged that by providing equipment-procurement services to its subsidiary,
the Unicom Group may force China Unicom to make decisions that differ from or even conflict with the interests ofChina Unicom’s other shareholders.
29

See, for instance, China Telecom’s 2022 annual report.

30

In its recent corporate sustainability reports, China Telecom disclosed that its centralised procurement suppliers
mainly come from mainland China. For 2021 and 2022, for instance, the total number of centralised procurement
suppliers amounted, respectively, to 19,041 and 24,237, with 18,515 and 23,706 originating in mainland China. Hence,for these two years the procurement of goods (and services) to China Telecom by local suppliers exceeded 97%.
Similarly, China Unicom reported that for the period 2019-21 more than 99% of its suppliers for its centralised
procurement (which represents, as mentioned above more than 90% of its procurement) were local suppliers. Although
China Mobile is not seemingly subject to the same concession fee, it also reported in its corporate sustainability reportsthat from 2020 to 2022, 100% of its centralised procurement suppliers came from mainland China. Note that values
for this company are, however, not reported for previous years.
OECD TRADE POLICY PAPER N°282 © OECD 2024 19
is manufactured by Huawei or ZTE may partly constitute a reflection of the two-tiered system. As of 2023,
58% and 31% of all 5G base stations in China had been manufactured by, respectively, Huawei and ZTE.31

2.2.3. State enterprises can be key actors in, and beneficiaries of, forced technology transfers
While international technology transfers (ITT) by companies can contribute to enhancing knowledge
diffusion and gains from trade, domestic policies and measures restricting foreign investment and market
access to force technology transfers may raise important trade and competition concerns. Forced
technology transfers commonly occur in situations where the owner of a technology (e.g. an investor or
licensor) is required or pressured to transfer technology to be able to access a foreign market or obtain thenecessary permits to operate under the same conditions as local firms (Andrenelli, Gourdon and Moïsé,2019[19]).
It is in general extremely difficult to document instances of forced technology transfers, including to quantify
the effects on foreign firms of such forced transfer (Sykes, 2021[20]).32. Transfer of knowledge a company
voluntarily engages in as part of a foreign investment, including in areas subject to investment restrictions,cannot be assumed to be forced, especially where the transfer of technology is not required or pressured
as a quid pro quo for market access. At the same time, evidence is especially hard to gather in the caseof implicit government policies or practices requiring or pressuring domestic companies to organise suchtransfers. Government-induced technology transfers may be the result of oral communications or ‘behindclosed-door’ agreements that cannot be traced. This is exacerbated by the fact that companies may bereluctant to report their experience on such policies and practices, particularly if they fear, as a result,losing access to valuable markets (Andrenelli, Gourdon and Moïsé, 2019[19]). Discerning what may appear
consensual but is in fact forced is also difficult: investors may feel they realistically have no choice but toaccept demands to transfer technology if their refusal could result in disadvantage to themselves while
technology would be transferred by their competitors anyway.
Public allegations of forced technology transfers exist mainly again in relation to China.33 There are notably
concerns about “corporate structure requirements” (Sykes, 2021[20]), which restrict foreign investment andare deemed to be used as a tool by Chinese authorities and firms to force the transfer of foreign technology.
Chinese authorities have, for instance, conditioned the right to invest in China on the formation of joint
ventures (JVs) (e.g. an equity joint venture or a contractual joint venture) with Chinese partners. They havealso imposed a percentage cap on foreign equity ownership, thus at times requiring that the Chinese party
within the JV be the controlling shareholder or the holder of the majority of the shares. Moreover, theChinese Government has set out administrative licensing and approval processes as a condition toestablish and operate a business in China. In other words, China has strictly disciplined and restrained
inbound foreign investment through a broad range of regulatory measures at the central and subcentrallevels, notably through the so-called Catalogue for the Guidance of Foreign Investment, as well as theSpecial Administrative Measures for Foreign Investment Access 34 – also known as the Foreign Negative
List – and the Special Administrative Measures for Foreign Investment Access in Pilot Free Trade Zones

31

See www.statista.com/statistics/1194757/china-market-share-of-5g-base-stations-by-manufacturer (accessed on
26 February 2024). This market share seemingly coincides with the market share the two telecommunicationequipment manufacturers equipment have maintained through successive bidding rounds since 2020. See
www.spglobal.com/marketintelligence/en/news-insights/podcasts/mediatalk-s2-ep-01(accessedon
26 February 2024).
32

See also https://eastasiaforum.org/2017/10/03/section-301-us-investigates-allegations-of-forced-technologytransfers-to-china/ (accessed on 28 February 2024).
33

In this respect, the United States Trade Representative (USTR) launched an investigation in August 2017 under
Section 301 of the 1974 Trade Act to inquire into China’s practices, including forced technology transfers. In
March 2018, USTR released a report on the findings of its Section 301 investigation, concluding that China engages
inter alia in forced technology transfer. Similarly, in June 2018, the EU brought a request for consultations with China
before the WTO dispute settlement system concerning certain measures imposed by China pertaining to the transfer
of foreign technology into China.
34

See www.ndrc.gov.cn/xxgk/zcfb/fzggwl/202112/P020211227540591870254.pdf in Chinese language only
(accessed on 22 May 2024).
OECD TRADE POLICY PAPER N°282 © OECD 2024

20 (FTZ)35 – also known as the FTZ Negative List, which both regulate foreign investments in China since2015. Under these two negative lists, foreign investments in specific industry areas may be prohibited or
restricted by requiring inter alia specific corporate forms or specific percentage of shareholdings by foreign
investors. Both negative lists were last updated in December 2021 and entered into force on
1 January 2022.
While restrictions regulating market access, such as mandatory joint-venture requirements oradministrative licensing and approval processes, can be encountered in different jurisdictions, they canhave the potential to result in the forced transfer of technology depending on the nature of the measures
themselves and the wider policy environment. For the purpose of informing policy discussions on this issue,
the OECD has organised measures related to ITT along a continuum that differentiates between threegroups of measures (Andrenelli, Gourdon and Moïsé, 2019[19]): green measures are aimed at creating anappropriate supporting environment for ITT; yellow measures may have the effect of imposing ITT tovarying degrees; and, orange and especially red measures may clearly result in the forced transfer oftechnology. This ITT continuum further classifies policies according to two main factors, namely (i) the
degree of compulsion the policies impose on foreign firms when they interact with local counterparts; and(ii) the effect they have on the extent of foreign firms’ control over their proprietary technology. Corporate
structure requirements often belong to the second category of measures: they may not traditionally set up
a quid pro quo for market access, yet conditions governing these measures, as well as policies or factors
shaping the broader environment, may be indicative of an involuntary ITT. Mandatory JV requirements
may, for instance, involve a de jure or de facto condition to transfer technology. Other factors related tothe measures themselves and to the broader policy environment (e.g. discrimination between domestic
and foreign firms, lack of transparency, and the presence or involvement of state authorities within boththe economy and domestic companies competing or partnering with foreign firms) may contribute toincreasing foreign companies’ vulnerability to involuntary ITT.
Chinese SEs have, in various industrial sectors, concluded multiple JVs with both direct foreign competitors
and upstream suppliers of key equipment as a result of mandatory JV requirements. All the major foreign
carmakers had, for instance, as of the mid-1990s entered into JVs with different Chinese automotive SEs.36
Likewise, foreign rolling-stock manufacturers seeking to access China’s vast and growing rail-supply
market in the early 2000s were required by central authorities to enter into JVs with domestic SEs. Between
2004 and 2006, key rolling-stock manufacturers, such as Alstom, Siemens, Bombardier and Kawasaki
Heavy Industries, as well as major producers of rolling-stock equipment (e.g. Nabtesco, Toya Denki,
Toshiba, Mitsubishi, Hitachi, ABB, and Wabtec) entered the Chinese market by winning contracts with thethen two state-owned rolling-stock manufacturers, CSR Corp. and CNR Corp., under the condition thatthey form local JVs, assemble the trains in China, as well as share their technological expertise (Lin, Qin
and Xie, 2021[21]; Ker, 2017[22]). The same phenomenon took place in the shipbuilding sector as importantforeign marine equipment players entered into JVs with Chinese shipbuilding SEs, including CSSC and
CSIC, in the mid-2000s and later, in the mid-2010s.37
Proving that these mandatory JV requirements, as well as other corporate structure requirements in China,
have amounted to forced technology transfers remains a delicate exercise. Broader policy factors such as
the wide range of measures enacted by the central government to accelerate indigenous innovation andensure Chinese companies become technology leaders in certain sectors, as well as the pivotal role played
by SEs in these efforts, might nonetheless indicate that these corporate structure requirements have
35

The Special Administrative Measures for Foreign Investment Access in Pilot Free Trade Zones apply to the 20
Chinese Free Trade Zones and one free trade port. See www.ndrc.gov.cn/xxgk/zcfb/fzggwl/202112/
P020211227540530036342.pdf in Chinese language only (accessed on 22 May 2024).
36

Chinese authorities used to limit foreign ownership in JVs to 50%, thus giving Chinese partners significant control
and bargaining power. The government also required all JVs to localise at least 40% of their parts and components
and to transfer knowledge and establish joint technical centres to train Chinese workers (Sims Gallagher, 2006[67]). In
addition, the Chinese Government imposed import quotas and high import tariffs (amounting to 80%-100%) on
automobiles and parts. These investment restrictions were, however, lifted in 2022 around the time Tesla established
its Shanghai factory. Import tariffs have also since been lowered.
37

In September 2016, CSSC, Carnival Corporation, and Fincantieri jointly signed a Memorandum of Understanding
for the construction of large luxury 133 500 GT cruise ships. The project partners subsequently concluded a binding
agreement in February 2017 for the construction of two cruise ships with an option for four additional ships.
OECD TRADE POLICY PAPER N°282 © OECD 2024 21
constituted an integral part of China’s broader industrial policy goal and were designed to help Chinese
firms achieve technological leaps.
In this respect, the multitude of JVs entered into by foreign companies with key manufacturing SEs might
have contributed to improving their performance and, even in some cases, helping them achieve
indigenous innovation. The obligation for foreign carmakers to enter into a JV with Chinese SEs, together
with high import barriers on imported cars and parts, may have, for instance, contributed to improving theoffering and profitability of Chinese state-owned carmakers (OECD, 2021[2]). In the rolling-stock industry,
Chinese rolling-stock manufacturers were able to introduce high-speed trains in 2007, permitting CSR
Corp. to win a major contract two years later over its foreign competitors (OECD, 2023[16]). The sector ofrolling stock is perhaps the most telling example where technology transfer contracts signed with CSR
Corp. and CNR Corp. allowed Chinese engineers through a process of ‘digestion and re-innovation’conducted at record pace to assimilate high-speed trains’ core technologies, including engines, dynamos,and electricity transmissions to railway signal control systems, which had formed part of the technologytransfer contracts (Lin, Qin and Xie, 2021[21]). Nabtesco reported, in this respect, in its 2005 annual reportthat:“When China's railway ministry held a tender for the manufacture of passenger trains with
operating speeds of 200 km/h as part of its project to increase train speeds on existing
tracks, Nabtesco participated in the bid in conjunction with a consortium of Japanesecompanies and Chinese train manufacturer Nanche Sifang Locomotive Co. The resulting
contract was for 60 trains, or a total of 480 railcars. At the strong request of China's
railway ministry, we also agreed to a transfer of our railway brake system technology to
Nanjing Puzhen Rolling Stock Works. Koshiro Yoshida, the head of our Railroad ProductsCompany, met with that company in Beijing on October 20, 2004 to sign the technology
transfer agreement.”
While the discussion above has focussed on how restrictions to inward investment may have compelledtransfers of foreign technology to Chinese SEs, SEs may also facilitate the transfer of technology throughoutward investment. This happens where, for example, SEs acquire foreign companies with backing fromthe state in an effort to obtain foreign technologies. The creation in 2014 of China’s National Integrated
Circuit Fund was, for example, quickly followed by a wave of acquisitions abroad by Chinese
semiconductor firms, several of which had received equity from the National Fund (OECD, 2019[23]) (thisis discussed further in the next section of the report).

2.3. Despite receiving more government support, state enterprises tend to underperform
Despite SEs receiving the subsidies and regulatory advantages described above, their financial
performance remains on average below that of their private peers. 38 This is particularly visible using
profitability metrics such as firms’ returns on assets and equity, which often decline with the proportion ofcompanies’ shares held by state entities (Figure 6).39 While the finding holds in the aggregate when poolingdata across all companies in the database, there can be nuances for individual sectors (Table A B.2). This
is notably the case for cement and automobiles, where companies with larger government ownershipappear to be more profitable than competitors. As noted in earlier work (OECD, 2021[2]), this may be dueto the presence of large energy subsidies in some regions of the world and to the (now revoked) obligation
for foreign carmakers in China to form JVs with local state-owned partners. In the former case, earlier
evidence (OECD, 2023[3]) strongly suggests below-market electricity and natural gas to have played a rolein increasing the profits of certain state-owned firms in heavy industries.40 In the case of automobiles, the38

Note that SEs’ below-average returns on equity could themselves amount to government support in the form of
below-market equity. See OECD (2021[2]).
39

Using profit margins yields similar results.

40

Removing firms from GCC countries from Figure 6 lowers the average return on assets for companies having 50%
or more government ownership from 4.9% to 4.4%. Cement offers a particularly strong example. In a 2011 note on
the Saudi cement sector, financial services provider Aljazira Capital noted, for instance, that: “Saudi cement companies
receive natural gas at a subsidized rate of USD 0.75/mmbtu from state-owned Saudi Aramco. […] Cement industry inOECD TRADE POLICY PAPER N°282 © OECD 2024

22 
former obligation imposed on foreign carmakers in China to form JVs with local state-owned companies
resulted for many years in above-average profits on the vehicles sold through these JVs. By contrast, sales
under the state-owned companies’ own brands do not seem to have generated much profit, and evenlosses at times.41 Whether or not these JVs ought to be considered SEs thus has a strong bearing on thefinding that SEs in automobiles had higher returns on average than private peers.

Figure 6. Profitability tends to decrease with the proportion of government ownership
Return on assets (segment-specific)

Return on equity

8.0%

20.0%

7.0%

18.0%
16.0%

6.0%

14.0%

5.0%

12.0%

4.0%

10.0%

3.0%

8.0%
6.0%

2.0%

4.0%

1.0%
0.0%

2.0%
Government
ownership <10%

Government
Government
ownershipownership>=10% & <25% >=25% & <50%

Government
ownership
>=50%

0.0%

Government
ownership <10%

Government
Government
ownershipownership>=10% & <25% >=25% & <50%

Government
ownership>=50%

Note: Both indicators are calculated using profit before tax and are averaged using firms’ revenue as weights. Segment-specific returns on
assets consider only the relevant business segments of industrial conglomerates spanning multiple sectors (e.g. semiconductors only for
Samsung Electronics). The data behind this graph cover the entire period 2005-22. See Annex A for more information on the firm sample.
Source: OECD MAGIC database.

Besides having worse financial results, SEs also tend to have higher levels of debt relative to their assets.
The comparison between firms is not straightforward, however. The capital structure of companies will
typically vary much more between sectors than between firms within a given sector. Heavy industries,
which are relatively intensive in physical capital, often rely more on debt whereas high-tech industries,
which are relatively intensive in intangible assets and R&D, tend to rely more on equity (Myers, 2001[24];Myers, 2003[25]). It is therefore necessary to compare SEs with their private peers within each individual
sector, or, alternatively, to standardise debt-asset ratios by sector. Doing the latter shows companies withat least 50% government ownership to have considerably higher debt-asset ratios than companies withless than 10% government ownership (Figure 7; left). Companies having between 25% and 49%
government ownership display, however, much lower debt-asset ratios on average. This seems largely
explained by the use of revenue-weighted averages, which give greater importance to large, debt-lightcompanies in aerospace & defence and semiconductors (e.g. Airbus, Leonardo, STMicroelectronics, andThales) (Figure 7; right). The data yield even clearer results for companies’ debt-equity ratios, showing
SEs to be more leveraged than their private peers (Figure A B.2).42

Saudi Arabia operates at the highest gross margin and net profit margin in the world.” See OECD (2023[3]) for a
discussion and more evidence.
41

See Box 1 in OECD (2021[2]).

42This may partly reflect a lesser propensity for SEs to issue new shares as a means of financing their assets.
Government owners may, for example, be reluctant to dilute their ownership of companies they view as strategic. Thatsaid, there have been numerous instances of government equity infusions in sectors such as semiconductors (OECD,
2019[23]) as well as government-led debt-equity swaps in certain heavy industries (e.g. aluminium, steel, andshipbuilding).
OECD TRADE POLICY PAPER N°282 © OECD 2024 23

Figure 7. State enterprises tend to have higher levels of debt relative to their assets
Standardised debt-asset ratios
Weighted average

Simple average

0.3

0.07
0.06

0.2

0.05
0.04

0.1

0.03
0

0.02
0.01

-0.1

0
-0.01

-0.2

-0.02
-0.3

Government
ownership <10%

Government
Government
ownershipownership>=10% & <25% >=25% & <50%

Government
ownership
>=50%

-0.03

Government
ownership <10%

Government
Government
ownershipownership>=10% & <25% >=25% & <50%

Government
ownership>=50%

Note: Debt-asset ratios are here standardised for each sector so they have a mean of zero and a standard deviation of one. The data behind
this graph cover the entire period 2005-22. See Annex A for more information on the firm sample.
Source: OECD MAGIC database.

The relationship between SEs’ financial performance, their indebtedness, and the support they receivefrom governments is complex. Whether government ownership makes it easier for companies to take on
debt, or whether government ownership leads to companies finding themselves in a position of needing
more debt remains to be determined. This also raises the question of the extent to which subsidies andother regulatory advantages affect companies’ performance and thus their ability to raise funds with debt
and equity investors.
From an accounting perspective, different types of subsidies affect different elements of companies’
income statements, with important implications for their profitability and perceived performance (Error! R
eference source not found.). As an example, energy inputs obtained at below-market prices lower firms’
cost of sales (2), which inflates their gross profit (3). Absent adequate information on energy subsidies,outside observers might wrongly consider these companies to be very efficient in converting their sales
into profit when in fact this owes much to government intervention. The same is true of government grants,
the impacts of which occur throughout income statements, and of below-market borrowings, which lower
firms’ financial expenses (10) and thus increase their profit before tax (11). Because these various
accounting metrics serve as the basis for calculating conventional financial indicators (e.g. return on
assets, return on equity, and interest coverage), subsidies may generate a misleading view of firm
performance, particularly where information on subsidies is inadequate. Although they are not easily
quantifiable, adding in the impacts of non-pecuniary measures discussed above such as discriminatory
public procurement rules and practices would likely aggravate the problem since they can also have theeffect of increasing companies’ sales and profits.

OECD TRADE POLICY PAPER N°282 © OECD 2024

24 

Table 1 Different types of subsidies affect different elements of companies’ income statements
Mock income statement and possible impacts of subsidies
Accounting metric

Possible incidence of subsidy instruments
Market price support increases the price per unit sold
Asset-related grants lower depreciation costs; below-market prices for energy
inputs and other intermediates reduce firms' production costs

Types ofinstruments
Market price support
Grants &below-market inputs

R&D grants lower firms' R&D costs

GrantsIncome-related grants are counted as non-operating income (or other income)GrantsBelow-market borrowings reduce firms' interest expenses

Below-market
borrowings

Income-tax
concessions
Below-market equity
returns

1)
2)

+
-

Sales revenue
Cost of sales

3)=

Gross profit

4)
4a)

-

Operating expenses
including R&D expenses

5)=

Operating profit

6)
7)

+
-

Non-operating income
Non-operating expenses

8)=

Earnings before interestand taxes (EBIT)

9)
10)

+
-

Financial income
Financial expenses

11)=

Profit before tax

12)-

Income tax expense

Income-tax concessions lower the amount of taxes paid by firms

13)=

Net profit after tax

Excessively low profit may indicate the presence of below-market equity returns
in the case of state enterprises

Note: This mock income statement assumes that companies are making a profit. Losses would show differences, particularly with regards toincome tax expenses.
Source: Authors’ elaboration.

The profitability of companies certainly seems to be affected by subsidies, with most forms of support
feeding into higher returns through larger profits before tax. Under a purely hypothetical scenario that
subtracts grants and below-market borrowings from company profits before tax (11), the return on assetsof SEs becomes markedly lower than it already is, thereby further widening the gap between private firms
and companies with larger government ownership (Figure 8, left).43 The same holds for the return on equityof firms with larger government ownership, which becomes negative once grants and below-market
borrowings are subtracted from companies’ profit before tax (Figure 8, right). Likewise, interest coverage,
which measures firms’ capacity to meet interest payments on their outstanding debt,44 appears
considerably worse once grants are removed from earnings before interest and taxes (EBIT) and belowmarket borrowings added back to interest expenses (Figure A B.3). While this is true across all categories
of firms, the difference is more visible for companies having at least 25% government ownership.

43

Return on assets in year t is calculated as profit before tax in year t (number 11 in Error! Reference source
not found.) divided by the average of assets in year t and t-1. Return on equity is calculated in the same way, but
replacing assets with equity and excluding cases where companies have negative equity. This is because firms withnegative equity tend to make large losses, which, together with negative equity, results in very large, positive rates ofreturn on equity.
44

Interest coverage is defined as EBIT (8) divided by interest expenses (10) in Error! Reference source notfound..
OECD TRADE POLICY PAPER N°282 © OECD 2024 25

Figure 8. Subsidies may generate a misleading view of firm performance
Left: return on assets; right: return on equity
Return on assets (no subsidies)
Return on assets (with subsidies)

Return on equity (before tax, no subsidies)
Return on equity (before tax, with subsidies)

7.0%

25.0%

6.0%

20.0%

5.0%
4.0%

15.0%

3.0%

10.0%

2.0%
5.0%

1.0%
0.0%

Government
ownership <10%

Government
Government
ownershipownership>=10% & <25% >=25% & <50%

Government
ownership
>=50%

0.0%

Government
ownership <10%

Government
Government
ownershipownership>=10% & <25% >=25% & <50%

Government
ownership>=50%

Note: Both indicators are averaged using firms’ revenue as weights and are calculated using profit before tax, which negates the need toconsider tax concessions. The graphs only consider government grants and below-market borrowings, thus omitting below-market inputs forwhich only few data points exist. Readers are advised that the counterfactual of no subsidies shown here is purely hypothetical and does
not represent what would actually happen were subsidies to be removed. The data behind this graph cover the entire period 2005-22. See
Annex A for more information on the firm sample.
Source: OECD MAGIC database.

While the hypothetical scenario described above can shed light on the impacts of support, there are atleast two important caveats to bear in mind. First is the fact that the data shown above do not reflect what
the performance of firms would actually be absent subsidies. Estimating this counterfactual would requiredetailed modelling to understand the behavioural response of companies following the withdrawal ofgovernment support. A second concern is that the numbers above do not account for important forms of
support which have been left out of the analysis due to lack of transparency and data. As alreadymentioned, this concerns first and foremost below-market energy inputs, which can have large effects on
gross profit (3) through lower cost of sales (2) (OECD, 2023[3]). Other below-market inputs may also
include, for example, land acquired or rented from governments for free or at preferential prices or cheaperintermediates. Finally, this could also concern non-pecuniary forms of government support such as theregulatory advantages mentioned above.
State enterprises do not only underperform in accounting terms, but also in terms of productivity in an
economic sense (Figure 9). Whether using a simple version of labour productivity or a more complex
measure of total factor productivity, both sets of indicators show that companies with less than 10%
government ownership are more productive than companies having 50% or more government ownership.
Conclusions are more ambiguous for companies falling in between, with labour productivity showing suchcompanies to be less productive than firms with less than 10% government ownership while total factor
productivity shows the contrary for firms having between 25% and 49% government ownership.

OECD TRADE POLICY PAPER N°282 © OECD 2024

26 

Figure 9. State enterprises in industrial sectors tend to be less productive
Average productivity by government-ownership category in USD;
left axis: labour productivity; right axis: total factor productivity
Labour productivity

Total factor productivity

160,000

3,000

140,000

2,500

120,000
2,000

100,000
80,0001,500

60,0001,000

40,000500

20,0000

Government ownership <10%

Government ownership >=10% & Government ownership >=25% &
<25%
<50%

Government ownership >=50%-

Note: Averages are weighted by firm revenue. Labour productivity is calculated as firms’ economic value added divided by their number of
employees. Total factor productivity is calculated using econometric estimates of firms’ production functions. These estimates rely on the controlfunction approach, whereby a flexible input (intermediates) is used to control for unobserved productivity shocks and obtain more accurate
output elasticities for the different production inputs (Levinsohn and Petrin, 2003[26]; Andrews, Criscuolo and Gal, 2016[27]). The resulting
productivity estimates are then purged of the impact of firms’ market power by removing estimated markups following the procedure proposed
by De Loecker and Warzynski (2012[28]). See Annex A for more information on the firm sample.
Source: OECD estimates based on the OECD MAGIC database.

Crucially, the productivity estimates above do not account for the subsidies firms receive, which could haveambiguous effects on observed productivity. On the one hand, one would expect grants and input subsidies
to increase firms’ earnings before interest, taxes, depreciation, and amortisation (EBITDA) (see Error! R
eference source not found.), which would then increase economic value added and therefore
productivity, keeping everything else constant. On the other hand, everything else is very unlikely to beconstant, with subsidies plausibly affecting decision-making within companies and thus productivity.
Ongoing OECD work suggests some of the subsidies measured in the OECD MAGIC database to affectfirm-level productivity negatively, which would have the effect of lowering the productivity of SEs the mostsince they receive relatively more subsidies (Figure 2).45
In sum, this section has shown that SEs in industrial sectors tend to get more subsidies than their privatecompetitors. The section has also shown that notwithstanding these larger subsidies, the industrial SEs
covered here also tend to be less profitable, more indebted, and less productive.

45

Interestingly, preliminary estimates indicate that subsidies account for most of the finding that government
ownership correlates negatively with productivity (and positively with capacity investment), leaving state ownership to
explain very little or zero of the remaining variance by itself. If verified, this would suggest that government ownershipcan be neutral for productivity and investment if SEs do not receive disproportionate amounts of subsidies.

OECD TRADE POLICY PAPER N°282 © OECD 2024

 27

3. State enterprises as providers of industrial subsidies
The previous section showed that SEs tend to receive relatively more support from governments. In
addition, a very significant share of all industrial subsidies tends to be intermediated by or provided throughSEs acting as suppliers of energy, financing, or parts and components to producers downstream (OECD,
2019[29]; OECD, 2021[2]; OECD, 2023[3]). These two findings together imply that companies in whichgovernments are significant shareholders can play a dual role as both recipients and providers of industrial
subsidies.
In this section, the analysis turns to the topic of SEs as providers by looking more specifically into the roleof: i) state banks as providers of below-market borrowings; ii) government funds as providers of belowmarket equity; and iii) state electric utilities as provider of below-market energy. A recurring concern
throughout is that, while profit-seeking private companies would normally seek to remunerate shareholders
adequately, those SEs that are under government influence may pursue industrial policy by offering othercompanies goods and services at price levels that do not ensure their own profitability or financial
sustainability. This has in turn important policy implications, discussed in the final section of the report, forthe definition of subsidies and the ability of trade rules to discipline trade-distorting subsidies.

3.1. State banks as providers of below market borrowings
In earlier work, the OECD has identified below-market borrowings (BMB) as a significant channel ofgovernment support (OECD, 2021[2]). BMB have been found to benefit companies from many countries,
but they are especially large in China. While they can in a few instances involve non-banking institutions46,
BMB usually involve state banks and other government financial institutions. This explains why thefollowing analysis concentrates by necessity on jurisdictions, of which China is the foremost example,
where BMB is prevalent and a substantial share of banking assets are held by government entities. China’s
largest state banks are also generally identified as lenders to the industrial companies covered in theOECD MAGIC database, which further motivates the focus of this sub-section.

3.1.1. State ownership, control, and influence in the banking system
State ownership of banking assets is especially significant in China, where the proportion of government
shares in the top 10 financial institutions by market capitalisation exceeded 39% in 2021 (Figure 10). This
contrasts with the extent of government ownership in the top 10 financial institutions of other major
economies. Except for Korea (16.6%) and Japan (5.4%), the top 10 financial institutions of other major
economies were on average less than 5% government-owned, and for some, entirely private. Among these
top 10 financial institutions in China, the first four were also the world’s largest banks by assets as of end
2022.47 Looking at a broader sample combining China’s largest banks (Figure 11), which together accountfor three quarters of China’s banking assets, shows that 64% of these assets are held by state-owned
entities. State ownership and influence across China’s banking system is thus pervasive due to the sheer
volume of assets of the country’s state-owned commercial banks, as well as the indirect presence of central
and sub-central authorities within other categories of banking institutions (Box 5).

46

For example, BMB may notably occur through the issuance of so-called ‘industrial revenue bonds’, which are
tax-exempt bonds issued by Industrial Development Corporations on behalf of private companies for specific projects.
They usually carry a lower nominal interest rate than regular bonds of comparable quality. See, for example,
https://gov.texas.gov/business/page/industrial-revenue-bonds (accessed on 22 August 2024).
47

See www.spglobal.com/marketintelligence/en/news-insights/research/the-world-s-100-largest-banks-2023(accessed on 23 August 2023).

OECD TRADE POLICY PAPER N°282 © OECD 2024

28 

Figure 10. State ownership of banking assets is especially significant in China
State ownership of the top 10 financial institutions by market capitalisation, 2021
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%

10.0%
5.0%
0.0%

China

Korea

Japan

UnitedKingdom

FranceGermany

Italy

United States

CanadaAustralia

Spain

Source: China Pathfinder, Rhodium Group.

Box 5. State ownership and influence across China’s banking system are pervasive
Although the banking sector in China appears rather fragmented with more than 4 000 commercial
banks (Bisio, 2020[30]), the six largest state-owned commercial banks – the so-called ‘Big six’ – held, asof end-2023, 41.7% of all commercial bank assets in China.1 While they are all publicly traded, theChinese Government, through the Ministry of Finance, Central Huijin Investment (a state-owned
investment company), and other SEs, remains the majority shareholder in these six institutions.
The 12 national joint-stock commercial banks, which constitute the second largest category of Chinesebanks by assets (17%), are not majority-owned by the government. Authorities often retain, however, acontrolling interest in them through state-owned investment or holding companies (ibid).
The Chinese banking system also comprises a broad range of city commercial and rural banks, eachof which hold 13-14% of the banking sector’s total assets. They have varying ownership structures andmay be majority-owned by private entities or individuals. Municipal or provincial governments often playnevertheless an important role in these institutions by maintaining key ownership stakes or an indirect
influence (Lam, Rodlauer and Schipke, 2017[31]).
As of September 2023, the six state-owned commercial banks, nine of joint-stock commercial banks
and five city commercial banks were designated as China’s systemically important banks (SIB) by the
People’s Bank of China and the National Financial Regulatory Administration of China. 2 The SIB list iscommon in many countries and also colloquially known as a ‘too-big-to-fail’ list.
In addition to these commercial banks, the Chinese Government has also established three national
state policy banks, namely the China Development Bank (CDB), the Export-Import Bank of China (EximBank), and the Agricultural Development Bank. There is ample evidence obtainable from annual reports
and corporate disclosures that these banks also provide lending to domestic industrial firms in
manufacturing sectors. CDB, for instance, may be well known for its growing international presence insupporting infrastructure projects abroad; however, the loans directed outside mainland China
accounted only for 2.3% of its total outstanding loans according to its 2017 and 2018 annual reports.

OECD TRADE POLICY PAPER N°282 © OECD 2024 29

Figure 11. The composition of China’s banking assets
China’s banking assets by bank category [left]
share of banking assets held by government entities, by bank category [right]
Large SE commercial banks
Joint-stock commercial banks
City commercial banks
Rural financial institutions
other financial institutions

SE-owned

privately-owned

100%

14.5%

50%
41.7%

13.3%

13.5%

0%
17.0%

Policy banks

Large SEcommercial
banks

Joint-stockcommercial
banks

City commercial
and rural banks(samples)

Source: National Financial Regulatory Administration, China (left); OECD research based on banks’ annual reports (right), covering all threepolicy banks, all big six state-owned commercial banks, all 12 joint-stock commercial banks and a sample of 25 city commercial and ruralbanks.
1. See www.cbirc.gov.cn/cn/view/pages/tongjishuju/tongjishuju.html (accessed on 21 February 2024).
2. See www.cbirc.gov.cn/cn/view/pages/ItemDetail.html?docId=1128949&itemId=915&generaltype=0 (accessed on 21 February 2024).

The Chinese banking system is characterised not only by its high degree of state ownership, but also by
the intricate ties Chinese banks, irrespective of their ownership, maintain with various levels of government.
Central authorities, as well as provincial and local governments, have been found to frequently intervenein the lending decisions of commercial banks (Bisio, 2020[30]; Hsieh, Bai and Song, 2019[32]), often usingbank lending as a policy tool to achieve pre-set industrial targets. In this respect, in February 2016, China’s
Ministry of Commerce issued an announcement titled “Several Opinions on the Financial Support ofIndustry for Stabilizing Growth, Adjusting Structure and Increasing Efficiency”, which calls on banks toprovide financial support for manufacturing sectors and for implementing the ‘Made in China 2025’ national
strategic plan.48 Likewise, ‘window guidance’ policies – i.e. informal policy instruments used by the
People’s Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC)
to guide financial institutions through lending quotas – as well as lending directives (e.g. regarding thepace and volume of lending) have formed an essential part of the Chinese policy toolkit (Kauko, 2020[33]).
The annual reports of the banks studied in this report (Annex F) note, for example, that these banks
respond to, and participate in, the implementation of national policies, including ‘Made in China 2025’, theBelt and Road Initiative, strategic emerging industries, ‘Going Global’, etc. Some banks have also signed
strategic co-operation agreements with the Ministry of Industry and Information Technology (MIIT) or the
National Development and Reform Commission (NDRC) (Zenglein and Holzmann, 2019[34]).49 Banking
institutions in China therefore appear as key implementing agents of the government’s industrial strategy.
Lending behaviour generally reflects these broad policies, with many of China’s bank loans benefitting48

See www.mofcom.gov.cn/article/b/g/201603/20160301287601.shtml (accessed on 21 August 2023).
As an illustration, in 2016, the China Development Bank and the MIIT signed a strategic co-operation agreement
providing that during the ‘13th Five-Year Plan’ period, the Bank will contribute to implementing ‘Made in China 2025’
through no less than CNY 300 billion of financing. See www.gov.cn/xinwen/2016-11/10/content_5130742.htm(accessed on 18 August 2023).
49

OECD TRADE POLICY PAPER N°282 © OECD 2024

30 
SEs50 and government infrastructure projects, at times even to the detriment of their profitability (Turner,
Tan and Sadeghian, 2012[35]; Cull, Martinez Peria and Verrier, 2018[36]).

3.1.2. Who’s afraid of the big, bad loan? The size, quality, and cost of loans supporting China’s
manufacturing sector
Considering the size of BMB received by industrial firms, the banking sector’s high state ownership, andthe degree of overlap between political objectives and lending activities, this section delves deeper into
China’s banking activities to shed more light on the ways in which SEs intervene in the financing ofindustrial assets. To that end, the analysis has collected financial information covering the period 2010-22
for China’s largest banks, which include two policy banks, the ‘big six’ large state-owned commercial banks,
11 joint-stock commercial banks and a sample of five city commercial and rural banks (Annex F). In thefollowing, these sampled banks are often collectively referred to as “major Chinese banks.”
Over the period 2010-22, the corporate loans of major Chinese banks have more than tripled, with the
manufacturing sector being the top recipient by a large margin (Figure 12).51 Consistent with the size of
their assets, loans from the ‘big six’ large SE commercial banks account for the largest share of these
corporate loans but joint-stock commercial banks appear to have grown in importance. While the current
stress in China’s property market is drawing considerable attention to real-estate loans, the volume ofloans that major Chinese banks are directing to the manufacturing sector has consistently exceeded thatwhich they provide to the real-estate sector.52 These manufacturing loans have recently increased very
rapidly, beginning in 2020 during the Covid-19 pandemic and accelerating further in 2022.
With rapid increases in loans comes the question of the financial risk of these transactions and their quality.
The quality of lending activities constitutes a crucial element in measuring the financial health and overallsoundness of banking institutions. The non-performing loan (NPL) ratio, i.e. the ratio of loans that are ‘nonperforming’ on a bank’s balance sheet to total loans in its portfolio, is the most widely used metric forassessing the quality of a banking institution’s loan portfolio. Loans that are not performing, also called badloans, form an inevitable part of banks’ business. Any attempts by banks to fully eliminate NPLs from theirloan portfolio may well prove impossible and ill-advised: it might contribute to dampening down credit
significantly and hence slowing the pace of economic activity, notably in most Asian and European
economies, where banks remain the main providers of corporate finance (ADB, 2021[37]).
While both the volume of NPLs and the NPL ratio are indicative of the credit quality of banks within acountry, the absence of a harmonised definition of NPLs limits the relevance of cross-country comparisons.
Caution should thus be exercised when comparing these values between jurisdictions (see Annex G).
Bearing this caveat in mind, data from the World Bank on the average NPL ratio of banks by country forthe period 2010-22 does not suggest China to have an outsized NPL ratio. The country’s ratio is generallycomparable to that of most OECD countries, with the notable exception of jurisdictions having experienced
banking crises over the past 10-15 years (e.g. Greece,Croatia, Cyprus,53 Italy, Ireland, and Portugal).
China’s NPL ratio has also significantly decreased since the late 1990s, at a time when Chinese state
50

Note that many SEs have, at the group level, a finance company, i.e. a non-bank financial institution providing abroad range of financial services to members of the group (e.g. provision to member companies of loans, loan
syndication services, financing consulting services, as well as acceptance of member companies' deposits, andunderwriting of group members' securities) (Lin, 2017[61]). This suggests that, along with the traditional banking sector,
SEs may obtain financing from other non-banking institutions.
51

For the purpose of this report, the analysis concentrates on corporate loans, which are those that matter from theperspective of industrial subsidies.
52

For the two policy banks covered in this study, infrastructure projects are the main target for China Development
Bank. The Export-Import Bank of China disclosed the breakdown by its loan programme, rather than sectors.
53

Note by the Republic of Türkiye: The information in this document with reference to “Cyprus” relates to the southernpart of the Island. There is no single authority representing both Turkish and Greek Cypriot people on the Island.
Türkiye recognises the Turkish Republic of Northern Cyprus (TRNC). Until a lasting and equitable solution is foundwithin the context of the United Nations, Türkiye shall preserve its position concerning the “Cyprus issue”.
Note by all the European Union Member States of the OECD and the European Union: The Republic of Cyprus isrecognised by all members of the United Nations with the exception of Türkiye. The information in this document
relates to the area under the effective control of the Government of the Republic of Cyprus.

OECD TRADE POLICY PAPER N°282 © OECD 2024 31banks had large NPLs on their balance sheets, forcing central authorities to adopt measures to clean up
these bad loans through the establishment of asset management companies serving as ‘bad banks’(e.g. Cinda, Orient, and Huarong).

Figure 12. Corporate loans to the manufacturing sector are the largest andhave recently increased faster
Left: volume of corporate loans by bank category, in CNY billions
Right: volume of corporate loans by recipient sector, in CNY billions
Large SE commercial banks
Policy banks
Joint-stock commercial banks
City commercial and rural banks (sample)

Manufacturing
Construction

16000

12000014000

100000

12000

80000

Real estate

10000
8000

60000
6000

40000

4000

20000

2000

0

0

Note: The graphs cover the two policy banks providing loans to industrial sectors, the ‘big six’ large state-owned commercial banks, 11 joint-stockcommercial banks out of 12, and a sample of five city commercial and rural banks. See Annex F for the list of banks covered. Of these banks,
the Export-Import Bank of China discloses loan breakdowns by loan programme rather than by sector and is therefore not included in the righthand-side graph.
Source: OECD research, based on banks’ annual reports.

The volume and ratio of NPLs for manufacturing loans are nevertheless much higher than the bank-wide
ratio and had been higher than real-estate loans up until China’s recent property decline (Figure 13). It
therefore took a severe decline in property prices for real-estate NPLs to finally surpass the NPL level ofmanufacturing loans. This suggests the quality of manufacturing loans to have been relatively weak overthe period considered, which raises questions about the ability of certain manufacturers to meet their debt
obligations.
There are, however, at least two reasons why one needs to view the above NPL numbers as conservative.
One is that “[b]ad loans [at Chinese banks] are being written off and transferred to asset managementcompanies on a massive scale, thus leaving them less visible on banks’ balance sheets” (OECD, 2022[38]).
The exact portion of loans being written off or transferred that concerns the manufacturing sector is not
identifiable from annual reports, however. Second is the fact that a sizable portion of performing loans are
susceptible to becoming non-performing. For this, it may be relevant to examine both the volume and ratioof the category of ‘special mention’ loans, i.e. loans that borrowers are able to service at present but for
which repayment may be affected by specific factors (Box 6 and Table A G.1).

OECD TRADE POLICY PAPER N°282 © OECD 2024

32 

Figure 13. The volume and ratio of NPLs for manufacturing loans are higher than the bank-wide
ratio and had been higher than real-estate loans until China’s property crisis
Left: average NPL ratio; right: aggregate volume of NPLs by sector, in CNY billions
All (bank-wide)
Real estate

6.0%

Manufacturing
Construction

Manufacturing
Construction

Real estate

500
450

5.0%
4.0%

400
350
300

3.0%

250
200

2.0%
1.0%

150
100
50

0.0%

0

Note: The graphs cover all the ‘big six’ large state-owned commercial banks, 11 joint-stock commercial banks out of 12, and a sample of fivecity commercial and rural banks. See Annex F for the list of banks covered. Policy banks did not disclose the breakdown of their NPLs byindustrial sector and are therefore not included in these graphs.
Source: OECD research, based on banks’ annual reports.

Box 6. China’s ‘special-mention loans’ and the NPL ratio
A large number of financial analysts and economists consider China’s NPL ratio to be understated,
implying that the true level of NPLs in China is considerably higher (IMF, 2016[39]; Kauko, 2020[33]).
Because a higher NPL ratio would force banks to abide by the required loan-loss provisioning(Table A G.1), which would curtail their lending capacity, some establishments may have had an
incentive to shift bad loans onto other entities or reclassify them. Many Chinese banks have, forinstance, classified some of their loans, which were more than 90 days overdue, as ‘overdue but not
impaired’, with a view to reducing the loan-loss the provisions they need to set aside to cover losses
from bad loans and thus to protect their capacity to lend, as well as their earnings.1
Along with this practice, banks have deployed various strategies to move their bad loans off theirbalance sheet, including by selling them to asset-management companies (e.g. ‘bad banks’ such as
Cinda, Orient, and Huarong), investing in trust and other entities subject to looser lending regulationsin the ‘shadow-banking’ sector, or undertaking debt-equity swaps (Lam, Rodlauer and Schipke,
2017[31]). The various methods and strategies employed by Chinese banks may therefore make their
credit quality appear better than it actually is. Efforts to estimate the magnitude of bad loans in China’sbanking sector have, for instance, found the ‘loans potentially at risk’ made to the corporate sector to
be much higher than the official NPL ratio alone would suggest (IMF, 2016[39]).
Combining NPLs and ‘special-mention’ loans together could offer one way to better approximate thetrue credit quality of loans in China’s traditional banking sector, particularly since “some loans may beclassified as ‘special mention’ even though they carry considerable credit risk.” 2 The ‘special-mention’loan category should in normal times shed some light on the potential magnitude of future NPLs,
although ‘special-mention’ loans would not necessarily all become non-performing (IMF, 2016[39];OECD, 2022[38]).

OECD TRADE POLICY PAPER N°282 © OECD 2024

 33
Two examples suggest that the category of ‘special mention’ loans used by the Chinese banking system
may well contain loans, which would be considered NPLs in other jurisdictions. For example, Chinesebanks may take account of the existence of collaterals attached to a loan to classify a loan as ‘nonperforming’ or ‘special mention’. Despite signs of borrowers’ financial difficulties, a bank may stillconclude that the loan will be fully repaid if the loans are collateralised (e.g. secured by land andproperties). The 2017 guidelines of the Basel Committee on Banking Supervision (BCBS) and majorbanking systems today consider, however, that the collateralisation of loans is irrelevant to determining
their classification (The World Bank, 2020[40]). Moreover, contrary to other banking systems, Chinesebanks tend to classify their restructured loans as ‘normal’ or ‘special-mention’ loans. This practice may
nonetheless change after the PBOC published new rules on asset classification in February 2023,
requiring that banks classify at least their restructured loans as ‘special mentions’ and, in someinstances, as non-performing.3
1. See, for example, www.caixinglobal.com/2018-06-12/regulators-pressure-banks-to-speed-up-bad-debt-recognition-101269502.html(accessed on 16 August 2023). The IMF and the World Bank recommended in 2017 that such a practice be eliminated in China (IMF and
The World Bank, 2017[41]). Note also that, while Chinese banks have had to comply with the standard international five-category loanclassification system since 2004, it does not stipulate the number of days required for loans that became overdue to be classified as nonperforming (see Annex G), hence leaving the decision as to when a loan turns bad to the discretion of banks.
2. See www.frbsf.org/banking/asia-program/pacific-exchange-blog/china-tightens-bad-loan-recognition-rules/ (accessed on 23 August2023).
3. See, for example, www.kwm.com/hk/en/insights/latest-thinking/Chinese-regulators-finalise-financial-asset-risk-classification-rules-forbanks.html (accessed on 23 August 2023).

Due to ‘special-mention’ loans, the value of total NPLs in China may be considerably higher than the NPL
ratio alone would suggest (Figure 14). While not all ‘special-mention’ loans should be deemed ‘nonperforming’, combining them with NPLs is indicative of the fact that the potential value of total NPLs in
China could be much higher. In this respect, Figure 14 shows that the NPL ratio of major Chinese banks
would have increased on average by three times in the hypothetical case where all ‘special-mention’ loans
would have fallen into the category of NPLs during the past decade. While the volume of ‘special-mention’loans remained fairly stable between 2015 and 2022 (following a surge between 2010 and 2014), the ratioof ‘special-mention’ to total loans consistently decreased during the period. This may reflect, among otherfactors, a renewed push by authorities to accelerate banks’ recognition of their NPLs so that they cansubsequently be written off and hence moved off their balance sheets. 54 Special mention loans are,however, not disclosed by target sector. It is thus difficult to judge how much of these special-mention
loans are related to manufacturing.
From the perspective of BMB, the key questions concern: (i) whether the entities providing the loans arestate-owned or state-related; and (ii) whether the terms and conditions of these loans are in line with market
principles, including in relation to accounting for the risk profile of borrowers. The earlier part of this section
has answered the first question in the affirmative. It then noted that the manufacturing loans provided by
China’s major banks are large and their level of risk larger than those directed at other sectors. The
remaining question therefore concerns the rates at which these loans are offered to corporate customers.

54

See www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/chinese-banks-set-to-cleanup-balance-sheet-more-quickly-in-q4-61427131 (accessed on 22 August 2023).

OECD TRADE POLICY PAPER N°282 © OECD 2024

34 

Figure 14. The value of total NPLs in China may be considerably higher than the NPL ratio alone
would suggest
Left: total volume of NPLs and special-mention loans, in CNY billions
Right: NPL ratio, with and without special-mention loans
NPL ratio

Total non-performing loans
Total special mention

5000
4500

NPL ratio, with special mention

6.0%
5.0%

4000
3500

4.0%

3000
2500
2000
1500
1000

3.0%
2.0%
1.0%

500
0

0.0%

Note: While not all ‘special-mention’ loans should be deemed ‘non-performing’, the “NPL ratio with special mention” shows a hypothetical casewhere all ‘special-mention’ loans are added to NPLs. Graphs cover all the ‘big six’ large state-owned commercial banks, 11 joint-stockcommercial banks out of 12, and a sample of five city commercial and rural banks. See Annex F for the list of banks covered. Policy banks did
not report ‘special mention’ loans and are therefore not included in these graphs.
Source: OECD research, based on banks’ annual reports.

For the major Chinese banks covered in this report (Annex F), average lending rates on corporate loans55
appear only slightly above or even below the PBOC’s one-year benchmark lending rates between 201022 (Figure 15). In the case of large SE commercial banks, lending rates remained the closest to the oneyear benchmark (a spread of only 20bp on average between 2010-22), which is even lower than the othercategories of banks in China. Four of these large SE commercial banks are also significant in that they
were ranked as the largest banks globally in 2022. 56 These spreads to applicable base rates are in stark
contrast with those found for other top 10 global banks not based in China (Figure 15). This finding is
consistent with what was found at the level of individual subsidy recipients using the OECD MAGIC
database; namely, that BMB are widespread in China. It is also consistent with reports that between a third
and a half of all bank lending in China was provided with interest rates that were equal to or below thecountry’s lending benchmark between 2010 and 2019 (OECD, 2019[42]).57

55

Calculated as interest income related to corporate loans divided by the corresponding loan amount.

56

See www.spglobal.com/marketintelligence/en/news-insights/research/the-world-s-100-largest-banks-2023(accessed on 23 August 2023).
57

According to the OECD’s Product Market Regulation indicators, China also counts among the few countries where
SEs have easier access to borrowings on preferential terms. See www.oecd.org/economy/reform/indicators-ofproduct-market-regulation/ (accessed on 5 September 2023).
OECD TRADE POLICY PAPER N°282 © OECD 2024 35

Figure 15. Average lending rates of major banks in China have been slightly above or below
the PBOC’s one-year benchmark
Spread to applicable base rates related to average interest rates on corporate loans, in basis points
Large SE commercial banks
Policy banks

Joint-stock commercial banks
Average largest OECD banks

City commercial and rural banks (sample)

400

300

200

100

0

-100

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Note: Average lending rates are calculated as interest income related to corporate loans divided by the corresponding loan amount. Theseaverage lending rates are compared against applicable base rates based on the currency of the loans. Of the sampled banks, only the ExportImport Bank of China did not disclose the breakdown of its currency and the analysis therefore assumes the currency mix to be 75% CNY and
25% USD, based on the bank’s loan programme. Base rates used for OECD banks are currency-specific interbank rates. The benchmark
lending rates for China refer to the Loan Prime Rate after its introduction in 2019 and to the previously used benchmark lending rates also
published by the PBOC before then. The graphs cover the two policy banks providing loans to industrial sectors, the ‘big six’ large state-owned
commercial banks, 11 joint-stock commercial banks out of 12, and a sample of five city commercial and rural banks. See Annex F for the list ofbanks covered.
Source: OECD research, based on firms’ financial data retrieved through annual reports and Factset, and benchmark rates from the PBOC.

3.2. Government investment funds as providers of below-market equity and below-market
equity returns
While it is much harder to identify and quantify, the provision of equity on non-market terms by SEs forms
an important alternative to BMB for the purpose of channelling below-market finance to industrial
companies. This happens when governments themselves, government-investment funds, or other SEs
serve as providers of equity either in the form of an equity infusion on non-market terms or through theiracceptance of below-market equity returns for sustained periods of time.58 State entities may use equity
infusions in various instances, with each responding to different objectives (e.g. achieving long-term
financial returns, assisting a distressed company in times of crisis, protecting a domestic troubled company
too important to fail for the economy, supporting national champions, etc.), which can have varying impacts
on trade and competition.
Capital injections involving state resources can raise trade and competition concerns, especially when they
are inconsistent with commercial practice or the expectations of private investors. Such concerns may
become more of a systemic issue where equity infusions provided by governments and governmentinvestment funds are systematically used to support – both directly and indirectly through a layer of verticaland horizontal state-related investments – domestic firms, with a view to achieving industrial-policy goals
outside of an emergency or crisis situation. The development and multiplication of government-guidance
funds (GGFs) in China used by central and subcentral authorities to channel important state resources into
its industries seems to reflect, in this respect, a systemic issue posed by this new state-related investment
vehicle.
58

In the remainder of this section, below-market equity and below-market equity returns correspond to, respectively,
governments providing equity infusions on non-market terms, hence giving a one-off benefit, and government
shareholders accepting lower returns than private investors, thus providing ongoing support.
OECD TRADE POLICY PAPER N°282 © OECD 2024

36 

3.2.1. The provision of emergency equity to help distressed companies in times of crisis
In times of crisis, governments have at times provided emergency equity to companies experiencing
serious difficulties. For example, during the 2008-09 global financial crisis, the U.S. Treasury took
temporary equity stakes of, respectively, 61% and 10% in General Motors and Chrysler, along with theprovision of large emergency loans (Goolsbee and Krueger, 2015[43]). More recently, the COVID-19
pandemic and Russia’s invasion of Ukraine have prompted some governments to use equity injections to
avoid the unnecessary collapse of systematically important companies (Christiansen and Sultan, 2020[44]).
Although government support programmes have mostly consisted of a mixture of grants to troubled firms,
government guarantees, as well as loans at low interest rates, a small number of governments have
stepped into companies that were not able to sustain more debt and for which the liquidity support it had
already provided was no longer sufficient to guarantee their long-term viability. Governments have, forinstance, injected fresh equity into distressed companies with weak balance sheets or engaged in debtequity swaps (Christiansen and Sultan, 2020[44]; OECD, 2021[45]). This is notably the case for certain
services providers, such as airlines, which were significantly affected by travel restrictions and sanitary
measures adopted during the pandemic 59, as well as for those energy providers affected by supply shocks
and soaring energy prices.60
Emergency government equity infusions are part of a rescue effort to avoid a costly failure in the shortterm and hence may not necessarily follow a long-term, profit-oriented logic from the government. While
such support can constitute an important and useful tool to deal with an emergency situation, this
“accidental” state ownership should be carefully designed and managed to minimise the potential
distortions to competition both at the time of, and following, the capital injection and thus to maintain a levelplaying field (OECD, 2021[45]). This form of emergency support should notably be: (i) transparent;(ii) proportional, i.e. limited to the minimum needed to ensure the viability of the recipient and designed
only to restore the capital structure of the recipient to that predating the crisis; and (iii) time-limited, thus
accompanied with an exit strategy of the government (Christiansen and Sultan, 2020[44]).61

3.2.2. The provision of equity infusions to assist a troubled company active in a sector deemed key
to the economy
Governments may also use equity infusions in ordinary times to assist and protect a company experiencing
difficulties in a sector deemed key to the economy. In 2013, for instance, the Japanese state-backed fund
INCJ acquired a 69% stake in domestic chipmaker Renesas at a time the company was incurring important
losses.62 Between 2015 and 2017, the Korean Development Bank and the Export-Import Bank of Korea
offered debt-equity swaps to Korean shipbuilder Daewoo Shipbuilding & Marine Engineering in a bid toimprove the company’s balance sheet.63 More recently, in 2020, the Hefei municipality and the Anhui
province in China rescued loss-making Chinese electric carmaker Nio using simultaneous equity infusions
from four GGFs, namely the Jianheng New Energy Fund, the Advanced Manufacturing Industry Investment
59

As an illustration, following the adoption by the European Commission in May 2020 of the second amendment to
the EU Temporary Crisis Framework, allowing Member States to provide recapitalisations aid in favour of non-financial
companies in need, the Commission approved no less than nine national state-aid measures in the form of equity
injections into national airlines or rail passenger service operator. See https://commission.europa.eu/strategy-andpolicy/coronavirus-response/supporting-jobs-and-economy-during-coronavirus-pandemic/state-aid-cases_en#
member-states (accessed on 14 February 2024).
60

See Box 8 in the next sub-section. Note that government equity infusions resulting from the COVID-19 pandemic
and Russia’s war of aggression against Ukraine have concerned for the most part companies in services sectors andnot in the manufacturing sector, except for Italian steelmaker ILVA, which received in 2021 an equity infusion fromstate-owned Invitalia.
61

See also second amendment of the Temporary Framework for State aid measures to support the economy in thecurrent
Covid-19
outbreakissuedon
8 May 2020,
availableathttps://competitionpolicy.ec.europa.eu/document/download/7c429c3e-c72c-48a6-ac2a-fc3a1652e3e3_en?filename=TF_consolidated_version_as_amended_3_april_and_8_may_2020_en.pdf (accessed on 25 February 2024).
62 After 10 years, in October 2023, INCJ announced it had successfully exited from its investment in Renesas. See
www.incj.co.jp/english/newsroom/upload/docs/E_PressRelease_INCJ_Renesas_20231025.pdf(accessedon
25 February 2024).
63 See www.businesskorea.co.kr/news/articleView.html?idxno=16355 (accessed on 13 February 2024). The
company was eventually sold to the Hanwha group in 2022 and renamed Hanwha Ocean.
OECD TRADE POLICY PAPER N°282 © OECD 2024 37
Fund, the New Energy Automobile Fund, and the Anhui High Tech Co. 64 In such instances, governments
do not generally pursue a long-term participation or long-term strategy designed to earn market-based
rates of return, as evidenced by their subsequent exit from the companies mentioned above. Careful design
and management of the government intervention are therefore key to minimise market distortions, as wellas to avoid systematic use of this instrument by governments.

3.2.3. Government-guidance funds in China: the systematic use of state-led equity infusions tofavour national champions
Contrary to occasional government equity infusions, capital injections into domestic firms through GGFs
have, in recent years, become a tool systematically used by Chinese central and subcentral governments
to create and support national champions, either state-owned or private. As part of their efforts toaccelerate indigenous innovation, Chinese authorities have used GGFs, namely state-led equity
investments, to channel public and private capital into strategic industries in China, thereby contributing to
guiding and advancing the government’s industrial policy goals. According to Naughton (2021[46]), thecreation of GGFs in 2005 proceeded from a desire to depart from an approach relying exclusively on directgovernment support and creating instead a hybrid financial instrument that would be both market-driven
and government-oriented (Box 7). GGFs remain, however, predominantly sponsored by government
agencies and SEs acting as key implementing agents of China’s industrial policy. In that sense, equity
infusions through GGFs do not differ significantly from direct equity infusions made by government
institutions and SEs to create or grow national champions. For example, in 2008, the Chinese Government
established through five different state investors (i.e. the SASAC, Shanghai Guosheng Group, Chalco,
China Baowu, and Sinochem) the Commercial Aircraft Corporation of China (COMAC) as an independent
aircraft manufacturer by separating two Shanghai subsidiaries from the Aviation Industry Corporation ofChina (AVIC) and transferring the intellectual property for China’s regional jet, the ARJ-21. In 2018, newstate shareholders then injected further capital into the company to bolster COMAC’s financial resources.65
State-investment vehicles are not a Chinese prerogative and exist in other jurisdictions. Examples would
include: the Norwegian Government Pension Fund Global, managed by Norges Bank; the MubadalaInvestment Company (Abu Dhabi); Saudi Arabia’s Public Investment Fund (PIF); Singapore’s Temasek;or the Japan Investment Corporation (JIC). However, many of these government investment funds do not
explicitly seek to support national champions in specific sectors. It is useful in this regard to view thesefunds and GGFs along a spectrum, starting, at one end, with sovereign wealth funds aiming to maximise
returns on their portfolio investments (representing generally less than 10% of the shares of the target
company). Moving along the spectrum, government funds exert more and more control over target
companies and objectives are broadened beyond solely the maximisation of investment returns. At theother end of the spectrum would be investment funds seeking explicitly to create or grow national
champions notwithstanding poor financial returns. In practice, many funds fall in between these two
extremes, such as Saudi Arabia’s PIF, which combines strategic investments in domestic companies witha foreign investment strategy centred on tech sectors and entertainment and high financial returns in thelong term.66 Some funds may also move along the spectrum over time, in one direction or another.
In this respect, five key aspects distinguish GGFs in China from various other government-investment
funds: (i) Chinese authorities have used GGFs systematically in recent years to channel support into
strategic, often mature, industries; (ii) use of these financial instruments responds to China’s industrial
policy goals to create national technology leaders; (iii) GGFs involve a complex structure of bothgovernment institutions and SEs that may not be guided solely by profit considerations; (iv) control ofChinese authorities over the investment decisions of the GGFs remains prevalent despite the appearanceof private sector participation; (v) transparency is crucially lacking not only with respect to the structure of64

See www.sec.gov/Archives/edgar/data/1736541/000110465920071391/tm2022004d4_ex99-1.htm (accessed on
25 February 2024). These investors have since reduced their holdings of NIO shares.
65

Similarly, in 2016, investments from the State Council, the Beijing municipal government, AVIC, and COMAC led
to the creation of another Chinese aircraft manufacturer, the Aero Engine Corporation of China (AECC).
66

See, for example, www.tresor.economie.gouv.fr/Articles/aa549f58-31ad-473b-ae7c9c8a6f7dc354/files/8ec101aa-4823-461e-b391-1ea700d97a10 (accessed on 27 February 2024).

OECD TRADE POLICY PAPER N°282 © OECD 2024

38 
the GGFs and the ownership of the investing entities, but also with respect to the investment criteria, theinvestment records and the performance of GGFs.

Box 7. The ‘in-principle’ institutional design of government guidance funds
GGFs are public-private entities, which can only be formed by a central, provincial, or municipal
government entity or several government entities. The initiating government agency guides andsponsors the creation of the fund by defining the purpose of the fund (e.g. the sectoral focus) and its
investment strategy (e.g. start-ups only, early-stage firms, or pre-IPO companies), injecting its own
capital to fulfil part of the fundraising target it determined, and designating a managing agency
responsible for handling the day-to-day operations of the fund (Pan, Zhang and Wu, 2021[47]; Naughton,
2021[46]). From this perspective, the government plays a key steering role in the creation, definition, andfinancing of the fund.
The Chinese Government initially modelled GGFs after public-private equity funds to bring private,
profit-oriented investors into the funds and hence guarantee market-consistent investment decisions(Pan, Zhang and Wu, 2021[47]), although few private actors have to date actually invested in GGFs. The
initiating government agency designates a separate managing agency (often state-owned) responsible
for the day-to-day operations of the fund, including individual investment decisions (Naughton, 2021[46]).
In principle, while the government sponsor sets the initial direction of the fund, it should not
subsequently interfere with the managing agency’s decisions to support or not specific projects. GGFs
may also operate as a fund of funds: they invest in other equity investment funds, thus becoming alimited partner of these funds, which in turn invest in specific projects and companies. This may widen
the gap between the initiating government agency and the ultimate investment: not only would thepresence of an intermediary limit, in principle, governmental interference with the investment decisions
taken by the sub-fund but it would also reduce the amount of state capital ultimately injected into a
company.1
The institutional structure of GGFs therefore suggests that these funds could in principle begovernment-steered but governed by market forces under the right circumstances, with the government
sponsor defining directly (or indirectly in the case of a ‘fund of funds’ structure) where market forces
ought to focus. In practice, however, and as discussed further below, the market-oriented elements of
GGFs are limited to date and funding remains dominated by both government entities and SEs primarily
guided by industrial-policy considerations (Figure 16).
1. To ensure that sub-funds remain sufficiently independent from the fund, and hence from the initial government sponsor, governments at
various levels have defined caps on the share a government can invest in a sub-fund (i.e. generally between 20% and 30%), as well as thecapital it can channel into the sub-fund. For instance, the local Optics Valley Fund cannot invest more than 25% in any of its sub-funds nor
can it inject more than CNY 100 million into any of these sub-funds. See www.caixinglobal.com/2020-02-25/four-things-to-know-aboutchinas-670-billion-government-guidance-funds-101520348.html(accessedon
14
February2024)
andwww.economist.com/business/2022/06/27/the-rise-of-chinas-vc-industrial-complex (accessed on 13 February 2024).

Government guidance funds in China have developed as a key tool to provide systematic support toChinese industrial policy
In 2005, the NDRC formally introduced GGFs by encouraging central and local governments to set up
venture-capital structures to guide investments, with a view to establishing and developing enterprises“through equity participation and the provision of financing guarantees.” 67 Although GGFs focused in thefirst years on venture-capital investments in startups, they gradually became a government tool to channel
capital into strategic and emerging sectors, with a view to increasing firms’ production capacity, their R&D
spending, as well as supporting their development through M&As.68 This coincides with the fact that
67

NDRC, Interim Measures for the Administration of Venture Capital Enterprises, 2005.

68

In 2015, for instance, a State Council chaired by Premier Li Keqiang took the decision to set up national-level GGFs
to support the development of emerging industries in China. More recently, several central ministries stated in a 2021
joint policy document that full freedom should be given to GGFs. Social capital should also be encouraged, according
to the document, in order to accelerate the cultivation and development of high-tech enterprises, including so-called
OECD TRADE POLICY PAPER N°282 © OECD 2024

 39
investments of GGFs must comply with national industrial policy. 69 In this respect, the development of thisnew financial instrument coincided with efforts by the central government to support industrial upgrading,accelerate indigenous innovation, and reduce China’s reliance on foreign technologies (Chen andNaughton, 2016[48]; Wei, Ang and Jia, 2023[49]; OECD, 2019[23]).
The creation in 2014 of the USD 23 billion China Integrated Circuit Industry Investment Fund Co. Ltd (alsoknown at the 'National IC Fund' or the 'Big Fund') and the subsequent establishment of sister funds at theprovincial and municipal levels (e.g. in Beijing and Shanghai) to support the development of thesemiconductor industry in China marked a decisive turn in the use of GGFs. 70 In the years following thecreation of the Big Fund in 2014 and the formulation of ‘Made-in China 2025’ a year later by the Chinese
central government, many other funds emerged at various levels of governments, including – among thenational GGFs – the National Advanced Manufacturing Investment Fund (2016), the National Emerging
Industry Investment Fund (2016), the Central SOE Structural Adjustment Fund (2017), the National
Manufacturing Transformation Upgrade Fund (2019), and the soon-to-be Strategic Emerging Industry
Fund (announced in 2023).71 Noticeably, some of these funds had between two and three rounds offunding.72
Since their introduction in 2005, the number of GGFs in China has grown very fast (Pan, Zhang and Wu,
2021[47]; Wei, Ang and Jia, 2023[49]). While their numbers remained low in the first years of their existence,
they started growing steadily after 2008 and experienced a boom in 2015 and 2016, following the creationof the Big Fund. In the last years, they have grown at a slower rate due to regulatory tightening by thecentral government and economic difficulties in China. 73 Despite this slowdown, the number of GGFs
created every year between 2017 and 2021 has remained significantly higher than in the period before
2015 (Wei, Ang and Jia, 2023[49]).74 With more than 1 800 GGFs having been established in China as of2021 (ibid), GGFs have become a systematic state-led instrument through which the Chinese Government
supports the technological advances of its domestic firms.

‘little-giant’ enterprises, individual champion enterprises in the manufacturing industry, and leading enterprises in theindustrial chain with specialisation. See the Guiding opinions of six departments on accelerating the cultivation anddevelopment of high-quality enterprises in the manufacturing sector, www.gov.cn/zhengce/zhengceku/202107/03/content_5622135.htm (accessed on 20 February 2024).
69

See Notice No 1638 [2019] by the NDRC, the People’s Bank of China, the Ministry of Finance and otherdepartments of further clarifying the matters concerning regulating asset management products for financial institutions
to invest in venture capital funds and government-invested industry investment funds, available atwww.gov.cn/xinwen/2019-10/26/content_5445159.htm (accessed on 22 May 2024).
70

The Guideline for the Promotion of the Development of the National Integrated Circuit Industry announced by theauthorities in June 2014 called for the promotion of “industry upgrades”, including through “mergers and regroupings”,
in the context of broader efforts to “encourage domestic integrated circuit companies to strengthen international
cooperation, integrate international resources, and open up international markets.”
71

See www.reuters.com/markets/asia/china-state-asset-manager-plans-14-bln-emerging-industry-fund-report2023-09-24/ (accessed on 20 February 2024).
72

In 2019, the central government launched a second round of funding for the National Advanced Manufacturing
Investment Fund of approximately EUR 6.4 billion to leverage artificial intelligence and 5G and guide the upgrading
and modernisation of manufacturing. Similarly, a second round of funding for the National IC Fund was completed in
2019, adding USD 29 billion for investments into upstream domestic semiconductor companies. In September 2023,
China launched a third round of funding under the National IC Fund, with a target of USD 40 billion, which will focus
on semiconductor manufacturing equipment. See www.reuters.com/technology/china-launch-new-40-bln-state-fundboost-chip-industry-sources-say-2023-09-05/ (accessed on 13 January 2024).
73

This includes the detention of the head of Hua Capital, the Big Fund’s manager, following a probe by China’s anticorruption
agency.
See
www.ft.com/content/ffb81a37-5239-4d5b-80b6-2b318084b460(accessedon
27 February 2024).
74

Drawing on the Zero2IPO database, Wei, Ang, and Jia (2023[49]) noted that while in 2016, newly-created GGFs
exceeded 400, there were less than 250 GGFs founded in 2017. Since 2018, such level has not been attained,suggesting that GGFs peaked in 2016. Yet, more than 100 GGFs were created annually, with this number exceeding
150 in 2018 and 2021.

OECD TRADE POLICY PAPER N°282 © OECD 2024

40 

Government guidance funds have struggled to attract private investors and are today largely composed ofgovernment institutions and state enterprises
Despite the initial intention of the Chinese Government to attract both public and private capital into GGFs,
these investment vehicles predominantly involve the state resources of both central and local government
institutions, as well as those of SEs through complex ownership structures, which may be hard to track. 75
The Big Fund is perhaps the most telling example, although many GGFs follow the same pattern. Seven
SEs joined the fund three months after it was set up by China’s Ministry of Finance (36%): the China
Development Bank (22%); China Tobacco, a SE under the State Council (11%); Shanghai Guosheng, aninvestment holding of the Shanghai municipality (9%); Wuhan Financial Holdings, the financial arm of the
Wuhan municipality (5%); China Mobile (5%); and Beijing E-Town International Investment andDevelopment (10%), an investment corporation of the Beijing municipality. In sum, state-related entities
provided altogether nearly 98% of the Fund’s first-round funding [TAD/TC(2022)9/FINAL], with SEs
overwhelmingly present both in the group of limited partners and in the management agency, Sino IC
Capital Co. Ltd, which is 45% owned by the China Development Bank (Figure 16).
Likewise, central enterprises owned by the SASAC are the exclusive limited partners of the SOE Structural
Adjustment Fund, which was created in 2016 by the Chengtong Corporation, a central SE converted intoa state-investment corporation (Naughton, 2021[46]). Although this fund was specifically designed toreorganise central enterprises, thus justifying their equity participation in the fund, they also attracted
capital from state-financial institutions, notably China Construction Bank, which is one of the six largest
state-owned commercial banks, and China Merchants Group, a bank holding company (ibid). 76

Figure 16. The institutional structure of GGFs in principle and in practiceIn practiceIn theory

Government
sponsorPrivate, social
partners

China’s Ministryof Finance
36%SEs, State banks
and local
governments
62%

Fund with limited
state capitalManaging
agencyNational IC Fund
(98% state-owned)

Importantprojects

Smaller
projects(e.g. Hua Hong, JCET, SMIC,
Tsinghua Unigroup)

Important projects

Sino IC Capital (45%owned by China
Development Bank)

Smaller
projects

Source: Authors' elaboration.

75

It may be even more difficult to trace back the ownership structures of local GGFs and funds of funds, notably due
to the absence of any obligation to publish accounting reports for these funds (Luong, Arnold and Murphy, 2021[62])(Chimits, 2023[63]).
76

Another large state-owned commercial bank, the China Postal Savings Bank, played a large role in initialorganisation of the fund although it did not become a limited partner.

OECD TRADE POLICY PAPER N°282 © OECD 2024 41

The overwhelming presence of the state in government guidance funds may affect their choices regarding
investment returns and exit
Although Chinese authorities tend to present GGFs as a market-oriented tool77, the limited existing
evidence for semiconductors suggests their returns to have been below-market (OECD, 2019[23]; OECD,
2021[2]). Sustained below-market equity returns at large chipmakers in which the Big Fund and sister funds
invested would suggest that semiconductor GGFs may have failed to act in accordance with market
considerations, at least over the period 2014-19 (ibid).78 What makes these findings particularly significant
is that the semiconductor industry is equity-intensive relative to other industrial sectors, where debt is often
the preferred source of finance and BMB is an important channel of support. Aerospace and defence form
another equity-intensive industry, where, to a lesser extent, the existence of below-market equity returns
involving government investors has been documented (OECD, 2021[2]). This is exemplified by the case of
COMAC (noted above), which has failed to generate any profit before tax since 2016.
Absent broader empirical evidence beyond the semiconductor industry, anecdotal, as well as
circumstantial evidence nonetheless raises questions about whether decisions of GGFs regarding theirinvestment and exit have always been consistent with market considerations. Given how GGFs have
gradually evolved towards investment vehicles dominated by government agencies, SEs, and state
financial institutions, aiming to create and support domestic champions in strategic emerging sectors, it
can be reasonably posited that they may not respond exclusively to the objective of producing financial
returns. In focusing on high-tech, technology-oriented sectors, with a view to gaining a technological edge
globally, various levels of government may use GGFs to channel capital into strategic firms, possibly
locking it in for a longer period than a private investor would normally tolerate. 79 In addition, there areindications that GGFs may tolerate extremely low rates of return.80 Naughton (2021[46]) notes, for instance,that although the Big Fund had officially announced targeting a 5% rate of return, some industry sources
stated that it had set up a separate, ‘strategic’ sub-fund with a 0% target rate of return, along with theofficial, ‘commercial’ sub-fund, which maintained the 5% target rate of return. The overwhelming presenceof SEs and state financial institutions within GGFs and governments' failure to attract sufficient private
capital would also tend to suggest that the tolerance of low returns beyond those that would normally be
acceptable to commercial players has been a feature of these investment vehicles.

3.3. State energy utilities as providers of below-market energy
The electricity sector constitutes another sector where state entities can play a significant role as providersof government support, in this case by supplying electricity (or natural gas) at below-market rates toindustrial users. Government ownership of electric utilities worldwide is significant. According to the IEA,
more than half of all investment in electricity networks in 2015 and 2019 came from state-owned
enterprises (IEA, 2020[50]). This predominance of SEs in the sector, often taking the form of integrated statemonopolies, may help explain why earlier OECD work has found several such companies playing a keyrole in supporting industrial firms through the provision of electricity at below-market rates (OECD, 2023[3]).
Unlike private companies seeking to recoup their costs and offer their shareholders competitive
remuneration, one would expect SEs involved in the provision of electricity at below-market (or below-cost)
rates to earn lower profit or make outright losses on their sales. Looking at a large range of electric utilities81

77

During the WTO’s 7th Trade Policy Review of China, the Chinese Government observed that the Big Fund is a
private equity fund in which “investment decisions are accountable to shareholders” and whose objective is to “deliverprofits for shareholders” (WTO, 2018[64]).
78

The firms studied by the OECD (2021[2]) include, among others, JCET, Hua Hong, SMIC, and Tsinghua Unigroup.

79

Along these lines, Naughton (2021[46]) observes that “the government provides money under conditions that makeit clear that it is in no hurry to get it back […] [it] waits patiently, its investment making an implicit zero return, thus
essentially providing interest-free loans to the investment.”
80

This has implications for sub-funds, which must also ensure they meet policy goals and prevent the loss of state
assets, to the detriment of investment returns. See www.ft.com/content/5f6d7ffb-575e-4532-9a4b-1658317d84a2(accessed on 23 January 2024).
81

This refers to all electricity companies covered by the Factset database.

OECD TRADE POLICY PAPER N°282 © OECD 2024

42 
over the period of 2005-22 shows companies with at least 25% government ownership to generally earnlower returns on assets than their private peers (Figure 17).

Figure 17. State power providers generally have had lower returns on assets than private peers
Return on assets of electric utility companies, revenue-weighted average over 2005-22
private or state share less than 25%

state share >=25%

5.0%
4.0%

3.0%
2.0%
1.0%

0.0%
-1.0%
-2.0%
-3.0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Note: Factset defines electric utilities as companies engaged in the generation, transmission, and distribution of electric energy to residential
and non-residential customers. The dataset only includes publicly listed electric utility companies covered by the Factset database.
Source: OECD based on Factset.

There are likely many reasons behind the poorer financial performance of state electric utilities, including
principal-agent problems, political interference, lack of competition, softer budget constraints, the pursuitof non-commercial goals, or simply a less favourable energy mix (Matuszak and Kabaciński, 2021[51]).
Public service obligations – such as the obligation imposed on many electric utilities to deliver electricity ataffordable rates for the benefit of the general public – are a further important consideration. The revised
OECD Guidelines on Corporate Governance of State-Owned Enterprises stipulate in this regard that SEs
should be compensated for the cost incurred in pursing public service obligations, while needing to ensurethat this compensation is neither excessive nor insufficient, but instead adequately based on net costs
related to fulfilling public service obligations and is done so transparently. Other than public service
obligations, the OECD Guidelines also recommend that SEs engaging in economic activities should be
expected to earn returns comparable to those of their private peers. The Guidelines further note theimportance of separating accounts related to economic activities and those related to public service
obligations in order to prevent cross-subsidisation. These aspects are key to maintaining both thecommercial viability of SEs and a level playing field with private counterparts.
Whatever the reasons behind the weak performance of state power utilities, the provision of electricity at
below cost is very likely to affect their returns. In this respect, state utilities may, similar to banks and GGFs
(see above), act as key agents for the industrial policy of a government by accepting to incur losses tosupport the competitiveness of companies downstream. Disentangling how different factors may have
impacted the returns of state utilities could, however, prove to be a difficult exercise. This report focusesinstead on instances in which state utilities more directly act on behalf of the government as a provider ofgovernment support, potentially causing trade and competition concerns. In tracking subsidies along thevalue chain, this report also looks at what may enable such support in cases where the state utilities
providing below-market electricity remain seemingly profitable.

OECD TRADE POLICY PAPER N°282 © OECD 2024 43

3.3.1. Accounting for government support in the form of below-market energy matters to maintain alevel playing field
The provision of below-market energy by SEs to industrial manufacturers can pose trade and competition
concerns where energy costs constitute an important competitive factor, thus improving the profitability ofrecipients. Below-market energy may enable recipient firms to offer lower sales prices than theircompetitors or to produce and invest more than they would otherwise. By allowing recipient companies tocompete with an advantage with their competitors both domestically and globally, below-market energy
could harm trade partners, as well as exacerbate the effects that other support measures already have onmarkets such as excess capacity weighing down on global prices. In this context, Figure 18 shows that
relative input costs for a sample of large energy-intensive companies have generally been lower in regions
where significant levels of energy subsidies have been identified in earlier OECD work (OECD, 2023[3])and by the IEA.82 This finding is the expected consequence of lower energy costs in energy-intensive
sectors translating into lower input costs overall.83

Figure 18. Firms based in regions known to provide energy subsidies have lower input costs
than competitors based elsewhere
Est. cost of intermediate inputs for selected industries (standardised)
1

0.5

0

-0.5

-1

-1.5

-2

China

GCC

India

OECD

Other

RussiaNote: The industries covered in this graph are aluminium, cement, fertilisers, and steel. Intermediate input costs are approximated by deducting
depreciation, amortisation, and staff costs from firms’ cost of sales and dividing the resulting number by revenue. The ratios thus obtained arethen standardised for each sector so that they have a mean of zero and a standard deviation of one. Lastly, the data are averaged by region or
country using firms’ revenue as weights. The data behind this graph cover the entire period 2005-22. See Annex A for more information on thefirm sample.
Source: OECD estimates based on the OECD MAGIC database.

82

See www.iea.org/topics/energy-subsidies (accessed on 23 February 2024).

83

This does not need to involve electricity only. Many industrial facilities have their own captive power plant on site,which they use to generate the electricity they need. In such cases, the provision of natural gas at below-market rates
has similar implications as the provision of electricity at below cost.

OECD TRADE POLICY PAPER N°282 © OECD 2024

44 

3.3.2. Instances where state electric utilities act as providers of below-market electricity
The provision of electricity at below-market rates to industrial users generally proceeds either fromstructural concerns or from short-term emergencies. In the first instance, government support aims to
improve the competitiveness of industries (particularly energy-intensive industries), whereas in the second
instance, it is meant as a short-term response to a crisis (e.g. a supply shock). In both instances, stateelectricity utilities can act as key agents of their governments in that they contribute to implementing thegovernment’s policy. In so doing, utilities often bear financial costs that would have otherwise been passed
on to, and borne by, industrial users. On some occasions, however, state electricity utilities are also
themselves recipients of government support. This can result in a chain of subsidies where state utilities
are able to preserve their profitability owing to the support they receive from authorities, even as they offer
electricity to users downstream at below cost. This underscores again that it is often essential to look atboth recipients and providers of government support along a value chain when identifying and measuringsubsidies.

Scenario #1: State electric utilities as providers of structural below-market electricity
Structural below-market energy is here understood as involving cases where: (i) support is long-lastingand helps improve industrial competitiveness, and (ii) the government regulates or administers theelectricity price. This prevents utilities from recovering their costs, including the costs of construction,
financing, maintenance, and operation of their power plants. In this respect, the electricity suppliers
concerned act as an intermediary between the government and the recipients of below-market energy. In
charging the price set by the government to end-users, state electric utilities are providers of below-market
electricity while bearing the financial burden of government support, thus potentially reducing theirprofitability.

Scenario #2: State electric utilities as providers of emergency below-market electricity
In a crisis or emergency context, governments may lean on state electric utilities to provide emergency
below-market energy to cushion users from price spikes. These measures are normally transitory and often
directed at households and small enterprises, with a view to alleviating energy poverty and improving
affordability (Castle et al., 2023[52]; OECD, 2022[53]).84 The energy crisis caused by Russia’s war of
aggression against Ukraine prompted many governments to intervene heavily in their energy markets tomitigate the impact of rocketing energy prices on their economy. In this context, many state-electric utilities
have been used as a shield to protect end-users (Box 8), which has led to a significant drop in their returns
since 2021 (Figure 17).
The examples in Box 8 illustrate that in times of crisis, governments may impose exceptional regulatory
measures or delay necessary price reforms, with a view to protecting consumers from a sudden surge inenergy prices. While such measures or decisions may constrain state electric utilities to provide electricity
at below-market rates, they are not primarily aimed at improving the competitiveness of industries on an
ongoing basis. Nor do they necessarily have such an effect where such support is short-lived and only
serves to offset a price surge. Sunset clauses are in that sense a necessity to ensure that the thin line
between emergency and structural support is not crossed (OECD, 2021[45]; OECD, 2021[54]).85

84

Ensuring that these measures are properly targeted at the most vulnerable households and businesses canbe a challenge, however (Castle et al., 2023[52]).
85

The European Commission adopted, for example, the so-called Temporary Crisis Framework in March 2022, which
loosens state-aid rules to enable EU Member States to help companies most affected by the energy crisis. Since its
adoption, Member States have provided emergency aids approved by the Commission, mainly taking the form ofgrants, tax concessions, guarantees and counter-guarantees, loans, and equity to both small- and medium-sizedenterprises and large industries. See https://competition-policy.ec.europa.eu/document/download/1b687754-5eab4447-bcbb-da0eb9ae61b9_en?filename=State_aid_TCTF_decisions.pdf (accessed on 23 February 2024).

OECD TRADE POLICY PAPER N°282 © OECD 2024

 45

Box 8. Many state-electric utilities have been used to shield end-users from soaring energy
pricesFrance’s Électricité de France (EDF) noted in its annual report for 2022 that it incurred a large loss in
2022 due largely to a drop in nuclear power output related to inspections and repairs for stresscorrosion, forcing EDF to purchase electricity on the market at the time electricity prices soared inEurope. The financial hit to the company was amplified by the government having set a cap on electricity
tariffs to mitigate the impact of energy price increases on consumers. This exceptional measure
prevented EDF from passing on its additional costs to consumers, thereby constraining the utility to sell
power at a discount. EDF and the French Government ultimately agreed in November 2023 on areference price level for power prices close to EDF’s nuclear production cost (i.e. EUR 70 per MWh)and on the introduction of a 90% tax imposed on EDF’s extra-revenues if prices surpass EUR 110 per
MWh.1
Similar to EDF, the Korea Electric Power Corporation (KEPCO) has experienced important difficulties
with rising energy prices. KEPCO’s operational costs have been significantly affected by increases in
the price for fuel (mainly coal and natural gas) and for the electricity it purchases at market price.
However, the company has not been able to pass on the increase to end users due to the government’s
regulated sales prices on electricity. In this regard, the energy crisis contributed to exacerbating
KEPCO’s pre-existing difficulties in relation to its high fuel costs.2 In response to the COVID-19
pandemic, the Korean Government decided to keep electricity tariffs unchanged through a capped-tariffadjustment system, preventing KEPCO from fully covering its increased fuel costs.3
Where utilities fare particularly badly, governments may intervene to provide support in compensation
for the financial hit they incur as a result of a crisis situation. While not initially state-owned, the 2022
energy crisis led to the full nationalisation of German utility Uniper by the Federal Government ofGermany following a series of government loans and equity infusions.4 French authorities likewise
recapitalised EDF in 2022 and opted to acquire all shares not previously held by the state, leading thecompany to be fully owned by the government.
In France, Germany, and other countries, the exceptional support for utilities was notably accompaniedby specific measures to shield energy-intensive businesses from the price spikes caused by the war in
Ukraine. In most cases, these measures took the form of direct grants meant to cover the additionalcosts resulting from higher prices for electricity and natural gas. 5 Despite these measures, theproduction volume of energy-intensive sectors has declined by more than 10% between 2021 and 2023
in both France and Germany.6 |This suggests that this exceptional support did not result in improved
competitiveness at the expense of foreign competitors but rather served to address an emergency
situation by preventing an even bigger decline in industrial activity in the European Union.
1. See www.reuters.com/business/energy/edf-france-agree-70-eurosmwh-electricity-price-deal-source-2023-11-13/ (accessed on
23 February 2024).
2. During the period 2018-20, for instance, its ratio of fuel costs to sales was around 30% as explained in KEPCO’s 2020 20-F report to the
US Securities and Exchange Commission.
3. See https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/sourceId/12391152 (accessed on 23 February 2024).
4. See www.bundesregierung.de/breg-de/aktuelles/uniper-takeover-2128422 (accessed on 23 February 2024). Uniper has since announced
it would start repaying the support it received, following improvements in its financial performance. See
www.reuters.com/business/energy/uniper-start-repaying-government-bail-out-after-68-bln-profit-2024-02-15/ (accessed on 16 February2024).
5. See, for example, https://competition-cases.ec.europa.eu/cases/SA.103280 andhttps://ec.europa.eu/commission/presscorner/detail/en/ip_22_4506 (accessed on 25 March 2024).
6. This can be seen using data from Insee and Destatis. See, for example,
www.destatis.de/EN/Methods/WISTAScientificJournal/Downloads/production-index-energy-intensive-industrial022023.pdf?__blob=publicationFile (accessed on 25 March 2024).

OECD TRADE POLICY PAPER N°282 © OECD 2024

46 

Scenario #3: State electric utilities as both providers of structural below-market electricity and recipients ofstructural support
Not only can state energy utilities be providers of government support, but they can also be recipients ofstructural support themselves. This support might often result from, and thus be intrinsically linked with,the provision of structural below-market energy, such as where governments compensate utilities for thelosses they incur as a result of lower energy prices.86 When providing below-market energy, state utilities
act most of the time on behalf of the government by selling energy at a price that is regulated oradministered by the government. In this context, governments may be providing various forms of support
in order to directly offset the financial consequences of below-market sales (e.g. grants, tax concessions,higher energy tariffs for government entities, interest-free loans, etc.). On other occasions, governments
may not explicitly link the provision of below-market energy with the support provided to state utilities. In
both cases, however, government support to state utilities lowers their costs; it also forms part of a broader
subsidy chain where different entities at the upstream and downstream stages are recipients of support.
One common type of support in this situation is below-market finance. Implicit state guarantees may, forinstance, convey an expectation that the government would support a state electric utility that is
experiencing difficulties but deemed too important to fail. These guarantees can have important cost
implications by reducing investors’ perceptions of a company’s default risk, thereby contributing to lowering
the cost of financing for the state utility in question. Likewise, the direct provision of BMB to state utilities
can help them finance costly capacity expansion by reducing the associated financing costs.87 For
example, while below-market energy for industrial users does not seem to be a widespread policy in China(Figure 18), earlier OECD studies indicate the presence of BMBfor the country’s large power operators(OECD, 2019[29]; OECD, 2023[3]).
Just as below-market (or below-cost) electricity supports industrial companies, below-market feedstock tostate power companies can lower their operational cost. Perhaps the most telling example is to be foundin Saudi Arabia, where the Saudi Electric Company (SEC), an electric power provider 81% owned by theKingdom of Saudi Arabia, provides electricity at tariffs regulated by the government, which “may not reflectcommercial or market terms, including any increases in the SEC Group’s cost of production.” 88 There isevidence that these low tariffs are at least partly compensated through the provision of government support
to SEC. One such benefit is in the form of subsidised fuel provided by Saudi Aramco – another statecompany 94% owned by the Kingdom. In addition to cheap feedstock, SEC has also historically benefitted
from significant government support in the forms of:“subsidised loans, higher tariffs for electricity supplied to Governmental customers, […]the assumption by the Government of certain payables due to Saudi Aramco in respectof supplied fuel, the granting of certain rights of way to SEC, the ability to defer significant
payments to Saudi Aramco, Saline Water Conversion Corporation ("SWCC") and certain
Government-related entities and the waiver of certain dividends.” 89
Subsidies such as these are likely helping state utilities to lower their costs and help them achieve better
returns. They may also partly explain why it is possible for some state electricity providers to continue
operating despite selling their products at prices below cost recovery.
86

This is the example of Saudi Aramco, which noted in a 2019 bond prospectus that the regulated prices mandated
by the Saudi Government “have been lower than the prices at which the Company could otherwise have sold suchrefined product.” As a result, “as at 1 January 2017, the Government implemented an equalisation mechanism tocompensate the Company for revenue directly foregone as a result of compliance with the mandates related to crudeoil, kerosene, diesel, heavy fuel oil and gasoline, with equalisation compensation recorded as other income related tosales.”
87

This would be especially the case in the context of long lead times for the construction of power plants, which canlead to accumulating capital costs.
88

See SEC’s 2020 sukuk (Islamic bond) prospectus. The prospectus details the different electricity tariffs set by thegovernment, which for industrial users were a flat rate tariff of SAR 0.18 (USD 0.05) per KWh.
89

See SEC’s sukuk prospectus, available at www.se.com.sa/-/media/sec/Investors/Debt-Investors/SukukIssuances/Project-Light---Base-Prospectus---Final.ashx (accessed on 16 February 2024).

OECD TRADE POLICY PAPER N°282 © OECD 2024 47
In summary, state power companies can at times act as providers of below-market energy, thereby playing
the role of intermediary between the government and industrial companies. They do so by bearing thefinancial burden of generating and selling electricity at below-market (or below-cost) tariffs while also
receiving government support themselves from upstream state actors (Figure 19).

Figure 19. Une usine à gaz!: Providers of below-market energy can also be recipients in a complex
subsidy chain
ProviderGovernment

ProviderSE – feedstockproviderRegulated pricebelow
cost-recovery

Cheap
feedstock

Capitalinjection,
implicit
guarantee,
specialwaiver, etc.

Regulated pricebelow
cost-recovery

ProviderRecipient

SE – electric utility
ProviderSE – banks

Belowmarket
borrowings

Industrial users
Belowmarket
electricity

Grants, tax
concessions,belowmarket
finance,
etc… *

Note: * For simplicity this diagram does not fully illustrate other types of government support received by industrial manufacturers.
Source: Authors' elaboration.

4. Implications for trade policy and broader considerations
This report has presented evidence that SEs in industrial sectors receive relatively more subsidies thantheir private competitors. It has also shown that these subsidies come at times from other SEs – be theystate banks, government investment funds, or state energy providers – acting as intermediaries between
governments and industrial producers. The question is now what these findings imply for policy, and for
trade policy in particular.

4.1. Can trade rules help address the support provided to and by state enterprises?
SEs in manufacturing sectors are relatively large recipients of government support, but also providers of
this support, which raises a number of trade concerns. Yet the WTO Agreements do not contain a definitionof SE, nor do they have a specific agreement or provision in place which would address both the distortive
conduct of SEs in the marketplace and the provision of support and other non-pecuniary advantages bygovernments to SEs. The WTO deals with some of these issues in the context of a range of specificdisciplines, notably the Agreement on Subsidies and Countervailing Measures – which regulates subsidies
bestowed by a government or ‘public body’ to specific undertakings manufacturing goods causing adverse
trade effects – and the plurilateral Agreement on Government Procurement. The WTO also allows WTO
Members to raise issues pertaining to SEs on an ad hoc basis during the accession negotiations withacceding countries [TAD/TC(2022)9/FINAL]. Many of the problems raised by the support SEs receive andprovide remain, however, currently unaddressed in the WTO Agreements.
By contrast, various Preferential Trade Agreements (PTAs) contain disciplines on SEs aimed at addressing
distortions caused by SEs receiving or providing government support and other regulatory advantages.
Although there are important differences across these agreements, the OECD has found that more thanOECD TRADE POLICY PAPER N°282 © OECD 2024

48 
70 of the 367 agreements in force in December 202290, i.e. around 20%, contain some form of disciplines
on SEs (Figure 20 and [TAD/TC(2022)9/FINAL]). Approximately 50 of these 70 agreements include
provisions that not only provide a definition of SEs, but also impose substantial obligations on SEs whenacting in the marketplace, as well as on governments in relation with their SEs.

Figure 20. PTAs with SE disciplines have increased over time, but remain geographicallyconcentrated
Left: Number of PTAs, by year of entry into force; right: by jurisdiction
PTAs with obligation of equal treatment under competition laws
PTAs without competition provisions

45

other PTAs with competition provisions

60

40

50

35

30

40

25

30

20
15

20

10

10

5
0

0

EU27 GBR MEX CHN KOR AUS JPN CAN USA GCC VNM

Note: Only PTAs that entered into force after 1990 and before 2023 are shown in the left graph. See Annex H for more information on the OECDmethodology for identifying SEs disciplines in PTAs.
Source: OECD research.

Among the differences observed across PTAs with disciplines on SEs, an important difference concerns
the lack of a harmonised definition of SEs. This matters since the definition of SEs determines the reachof the obligations imposed on both SEs and governments in their relationships, as well as the reach of theprovisions placing obligations of transparency on governments. Some definitions envisage, for example,
rather broad coverage by capturing as SEs entities directly and indirectly owned or controlled by thegovernment, including through voting rights or the presence of government representatives within theentity’s management bodies.
Meanwhile, only a handful of PTAs with disciplines on SEs have specific provisions that regulate the direct
or indirect provision of government support limited to SOEs,91 hence addressing the issue posed by SEs
as recipients of government support.92 These agreements prohibit the provision of so-called ‘noncommercial assistance’ (NCA), that is, assistance bestowed directly or indirectly by governments tospecific SOEs causing ‘adverse effects to the interests of another Party’. 93 The United States-Mexico90

For details on the methodology, see Annex H.

91

The term SOEs is used as the disciplines distinguish between SOEs and SEs: the agreements prohibit noncommercial assistance to SOEs provided by governments or SEs causing adverse effects. Different definitions areattached to these two terms.
92

Note that the current WTO subsidy disciplines apply to subsidies received by all enterprises, irrespective of theirownership status.
93

The first PTA to include such provisions was the Comprehensive and Progressive Agreement for Trans-PacificPartnership. Since then, three other agreements, namely the Australia-Peru FTA, the United States-Mexico-Canada
Agreement, and the United Kingdom-Australia FTA have integrated disciplines on NCA. Note that the United KingdomAustralia FTA entered into force in May 2023 and thus was not included in the earlier OECD study[TAD/TC(2022)9/FINAL].

OECD TRADE POLICY PAPER N°282 © OECD 2024

 49
Canada Agreement (USMCA) also prohibits outright, without the need to show adverse effects, threedifferent types of subsidies when provided to financially unsustainable SOEs. 94
Some PTAs deal with the issue of SEs as providers of support and other undue advantages by including
obligations on SEs disciplining their conduct in relation to downstream or upstream companies. The
obligation prohibiting SEs to provide NCA to other SOEs causing adverse effects regulates subsidisation
occurring between SEs at different levels of production or in different markets. Moreover, the obligations
to act ‘in accordance with commercial considerations’, as well as obligations in relation to
non-discrimination, which are more commonly found in PTAs, apply to SEs in their relationships with bothstate and private enterprises, although they are not specifically geared towards the provision of
government support by or through SEs.95
In sum, various PTAs already include – although with some limitations [TAD/TC(2022)9/FINAL] –advanced disciplines on SEs, which could help to address the trade and competition distortions arisingfrom government support and regulatory advantages provided to and by SEs discussed in this report.
Notably, the obligations that certain PTAs impose on SEs to regulate their conduct vis-à-vis downstream
and upstream firms could serve to complement multilateral subsidy rules. Disciplines focusing on theprovider rather than the recipient could better capture, for example, the systematic provision of belowmarket finance and below-market energy inputs by, respectively, state financial institutions and stateutilities.
The geographical coverage of those PTAs remains, however, a key challenge if countries want to address
meaningfully distortions stemming from government support and regulatory advantages to and throughSEs. Given the geographical concentration of manufacturing SEs, the relevance and effectiveness of future
disciplines on SEs may depend upon whether adhering countries include those jurisdictions where tradeand competition issues in relation to industrial SEs have been significant (Figure 20).96
While a multilateral discipline on SEs covering all WTO Members would constitute a first-best outcome,increasing the number of WTO Members having PTAs with disciplines on SEs could constitute a first
avenue. Yet, garnering consensus on even basic common rules across the WTO membership or amonga broader number of WTO Members may prove very difficult. In this context, knowledge and experienceacquired at the bilateral or plurilateral level are key to informing multilateral efforts, as is a solid evidencebase on the scope and scale of government support provided to and by SEs. OECD work such as thisreport offers an important contribution, but more is needed, including on identifying potential gaps within
the different PTAs containing disciplines on SEs.
OECD instruments such as the revised OECD Guidelines of Corporate Governance on State-Owned
Enterprises could enable a convergence of views among countries on the various approaches, as well as
on how trade and competition distortions may better be addressed. Encouraging more countries, notably
outside the OECD area, to adhere to these Guidelines would be an important step in building greaterawareness of issues related to the support provided to and through SEs and the actions necessary toaddress them.

94

Article 22.6(1) USMCA. These subsidies are (i) loans or loan guarantees to uncreditworthy SOEs; (ii) noncommercial assistance to an SOE that is insolvent or on the brink of insolvency without a credible restructuring plan
designed to return the SOE within a reasonable period of time to long-term viability; and (iii) conversion of theoutstanding debt to equity when inconsistent with the usual investment practice of a private investor. Note that other
PTAs, such as the agreements which the European Union concluded with Korea in 2010, as well as with Japan andSingapore in 2018, include a prohibited subsidy category for subsidies to non-financially sustainable enterprises,
although these do not specifically target SEs.
95

Only the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the Australia-Peru FTA, the
USMCA, and the United Kingdom-Australia FTA combine provisions related to both the first obligation prohibiting NCA
and the second cluster of obligations. Note that the obligation to act ‘in accordance with commercial considerations’and the ‘non-discrimination’ obligation are also contained in the Comprehensive Agreement on Investment concluded
between China and the European Union. See Article 3bis(3) of the Agreement.
96

Note, however, that the Comprehensive Agreement on Investment concluded between China and the European
Union in December 2020, and whose ratification has been suspended, contains a comprehensive definition of SEs,
as well as substantive and transparency obligations in relation to SEs.

OECD TRADE POLICY PAPER N°282 © OECD 2024

50 

4.2. Support to and through state enterprises has broader implications for trade policy but
also the environment
4.2.1. The involvement of SEs as providers of support requires a rethink of subsidy rules
Perhaps the most significant implications from a policy standpoint originate in the finding that SEs can beproviders of support. The fact that SEs are providers of support means that subsidies may not directly
come from the government but are instead provided through a set of companies acting on behalf of thegovernment. The use of SEs as a vehicle for government support has far-reaching consequences in thatit can give the appearance of severing the link between policy and funding. The distance created between
policy measures and their translation into actual flows of money can be wide. It can span multiple
companies, such as where chains of entities beneficially owned by the state are involved in the provisionof equity funding to industrial firms. It can span multiple stages of a value chain, such as where a SE
provides subsidised natural gas to a state-owned power provider, who goes on to provide subsidised
electricity to a primary manufacturer, who then supplies intermediate inputs downstream. It can even span
multiple jurisdictions, such as where the overseas activities of a SE result in subsidised production in third
countries (Beck et al., 2023[55]). In many such cases, the involvement of SEs is a necessary condition forthe provision of government support, as the presence of profit-seeking actors within these subsidy chains
would likely have the effect of stopping the flow of below-market inputs.97
The length of the chain between the initial government policy actor and the actual flows of support canmake it very challenging to identify individual measures underpinning government support. There is often
no publicly available paper trail showing how decisions by governments are influencing the actions ofindividual SEs. Demonstrating this influence is especially difficult in the context of trade disputes, where
the level of proof required may be high. In that sense, the involvement of SEs as providers of support
currently poses a significant challenge for trade rules.
More fundamentally, the legal and economic apparatus crafted over the years to analyse and discipline
subsidies proceeds from the perspective that subsidies are specific policies that can be identified (andquantified in the best of cases). The involvement of SEs as providers of support challenges this, and may
require an approach that views subsidies as a flow of money along a chain rather than as a specific policy
measure. Subsidy work needs to start ‘following the money’, which implies the use of tools in relation toaccounting and finance to track evidence of government funding across companies, sectors, and countries.
Viewing government support as an ecosystem in which support flows in multiple directions andfundamentally reshapes markets poses challenges for approaches based on specific transfers, but may
open the way for more comprehensive solutions to the multiple market distortions engendered by support
to and through SEs.
This report has demonstrated one possible way of ‘following the money’ by approaching industrial
subsidies in a pincer movement from the recipient side and the provider side. The fact that the evidence
obtained from the provider side (state banks or utilities) is consistent with that obtained from the recipientside (industrial firms) forms overall a solid account of how chains of industrial subsidies work in practice.
As countries attempt to lower their CO2 emissions and meet their climate commitments, government
support is gradually shifting toward sectors deemed ‘green’ such as the production of solar photovoltaic
modules, wind turbines, electric vehicles, batteries, and hydrogen electrolysers. Much support is also goingtoward semiconductors and other digital technologies (for, e.g., national security or supply-chain
resilience). One important feature of green and digital sectors, however, is that they are characterised bya relatively low presence of SEs. None of the top producers of solar modules or cells are state-owned. Topbattery producers (e.g. BYD, CATL, LG Energy Solution, or Panasonic) are all private, as are major
vendors of semiconductors and electric vehicles. This implies that the future could potentially see relatively
less concerns over SEs as subsidy recipients but a persistence of concerns in relation to SEs as providers,and an enduring need to ‘follow the money’.

97

There could be cases where private firms are required by law to provide subsidies to their customers (e.g. private
fertiliser producers in India) but in this situation the existence of a clear policy visible to everyone, namely the applicablelaw, is generally not in doubt.

OECD TRADE POLICY PAPER N°282 © OECD 2024 51

4.2.2. Government support to and from SEs may also have environmental implications
It is interesting to note that the industrial sectors where SEs have the largest presence tend to be heavy
industries. This is the case, for example, in aluminium smelting, cement, chemicals, fertilisers, andsteelmaking (Table A B.1). Besides having a large presence of SEs, these sectors also have somethingelse in common: they are energy- and CO2-emissions-intensive. Collectively, they account for nearly 60%
of all electricity and 70% of all energy used in manufacturing worldwide (OECD, 2023[3]). Cement alone
reportedly accounts for about 8% of global anthropogenic emissions of CO 2.98 Steelmaking emissions arelarger than those coming from global road freight, at around 4% of global emissions (a conservative
estimate).99 Chemicals add another 5% (Gabrielli et al., 2023[56]), aluminium 2% (WEF, 2023[57]), etc. All
told, a plausible range for the share of anthropogenic global CO2 emissions resulting from the heavy
industries listed above would be 20% to 25%.
A large proportion of industrial subsidies thus flows to SEs which have a relatively large presence incarbon-intensive industries. Moreover, recent evidence for the steel and aluminium industries suggests
these subsidies act to increase firm-level CO2 emissions (Garsous, Smith and Bourny, 2023[58]). The logicalconsequence is that subsidies to SEs are possibly a significant contributor to CO2 emissions. An
aggravating factor is the finding in this report that SEs in the energy sector are themselves providers of
support in the form of below-market energy inputs, most of which take the form of fossil-based electricity
and natural gas (OECD, 2023[3]). While this report is concerned with the market distortions caused bygovernment support to and from SEs, it has second-order environmental implications considering that a
reduction of this support could make a genuine contribution to lowering global CO2 emissions.
That said, SEs are also found in sectors other than heavy industries, and particularly in the production oftransport equipment. Several top firms in aerospace and defence are state-owned, partly or fully.
Shipbuilding and rolling stock are each dominated by a giant Chinese SE (CSSC and CRRC, respectively)
while the production of internal combustion engine cars in China (the world’s largest car market) has long
involved joint ventures between foreign carmakers and local state-owned carmakers. Given that transport
represents another large contributor to anthropogenic global CO 2 emissions, this suggests an additional
environmental angle in relation to the support that SEs receive. At any rate, the support that SEs receive
ought to be part of future discussions around climate-change mitigation and low-carbon pathways.
The discussion above is preliminary, but indicative of possible new approaches to the problems posed byindustrial subsidies and SEs at the OECD and elsewhere. This suggests several interesting avenues for awork agenda at the intersection of trade, competition, and the environment. The presence of large SEs in
CO2-intensive industries and the subsidies they receive have, for example, potentially large consequences
for carbon leakage and measures seeking to combat it. This is especially the case where differences in
the amount of subsidies that different countries provide largely outweigh differences in their carbon prices.
This is an area for investigation in future work.

98

See Cheng et al. (2023[66]) and www.chathamhouse.org/2018/06/making-concrete-change-innovation-low-carboncement-and-concrete (accessed on 27 February 2024).
99

See www.iea.org/reports/iron-and-steel-technology-roadmap (accessed on 27 February 2024).

OECD TRADE POLICY PAPER N°282 © OECD 2024

52 

References
ADB (2021), Nonperforming Loans in Asia and Europe: Causes, Impacts, and Resolution
Strategies, Asian Development Bank, Manila, Philippines,
https://doi.org/10.22617/TCS210412-2.

[37]

Aghion, P. et al. (2015), “Industrial policy and competition”, American Economic Journal:
Macroeconomics, Vol. 7/4, pp. 1-32, https://doi.org/10.1257/mac.20120103.

[6]

Andrenelli, A., J. Gourdon and E. Moïsé (2019), “International Technology Transfer Policies”,
OECD Trade Policy Papers, No. 222, OECD Publishing, Paris,
https://doi.org/10.1787/7103eabf-en.

[19]

Andrews, D., C. Criscuolo and P. Gal (2016), “The Best versus the Rest: The Global Productivity
Slowdown, Divergence across Firms and the Role of Public Policy”, OECD Productivity
Working Papers, No. 5, OECD, Paris.

[27]

Beck, J. et al. (2023), “Tackling Cross-Border Subsidies in the EU: The Need to Build on a
Promising Start Part 1”, Global Trade and Customs Journal, Vol. 18/Issue 10, pp. 376-379,
https://doi.org/10.54648/GTCJ2023047.

[55]

Bisio, V. (2020), China’s Banking Sector Risks and Implications for the United States, Staff
Research Report, U.S.-China Economic and Security Review Commission.

[30]

Castle, C. et al. (2023), “Aiming better: Government support for households and firms during theenergy crisis”, OECD Economic Policy Papers, No. 32, OECD, Paris.

[52]

Cheng, D. et al. (2023), “Projecting future carbon emissions from cement production indeveloping countries”, Nature Communications, Vol. 14/1, p. 8213,
https://doi.org/10.1038/s41467-023-43660-x.

[66]

Cheng, H. et al. (2019), “Do Innovation Subsidies Make Chinese Firms More Innovative?
Evidence from the China Employer Employee Survey”, NBER Working Paper Series,
No. 25432, National Bureau of Economic Research, Cambridge, MA,
https://doi.org/10.3386/w25432.

[8]

Chen, L. and B. Naughton (2016), “An institutionalized policy-making mechanism: China’s return
to techno-industrial policy”, Research Policy, Vol. 45/10, pp. 2138-2152,
https://doi.org/10.1016/j.respol.2016.09.014.

[48]

Chimits, F. (2023), “What Do We Know About Chinese Industrial Subsidies?”, CEPII Policy
Briefs, No. 2023-42, CEPII, Paris.

[63]

Christiansen, H. and S. Sultan (2020), Equity injections and unforeseen state ownership ofenterprises during the COVID-19 crisis, OECD Policy Responses to Coronavirus (COVID-19),
Paris.

[44]

Criscuolo, C., G. Lalanne and L. Díaz (2022), “Quantifying industrial strategies (QuIS):
Measuring industrial policy expenditures”, OECD Science, Technology and Industry Working
Papers, No. 2022/05, OECD, Paris.

[59]

Cull, R., M. Martinez Peria and J. Verrier (2018), “Bank Ownership: Trends and Implications”,
Policy Research Working Papers, No. 8297, The World Bank, Washington DC.

[36]

OECD TRADE POLICY PAPER N°282 © OECD 2024

 53
De Loecker, J. and F. Warzynski (2012), “Markups and Firm-Level Export Status”, American
Economic Review, Vol. 102/6, pp. 2437-2471, https://doi.org/10.1257/aer.102.6.2437.

[28]

Gabrielli, P. et al. (2023), “Net-zero emissions chemical industry in a world of limited resources”,
One Earth, Vol. 6/6, pp. 682-704, https://doi.org/10.1016/j.oneear.2023.05.006.

[56]

Garsous, G., D. Smith and D. Bourny (2023), “The climate implications of government support inaluminium smelting and steelmaking: An Empirical Analysis”, OECD Trade Policy Papers,
No. 276, OECD, Paris.

[58]

Goolsbee, A. and A. Krueger (2015), “A Retrospective Look at Rescuing and Restructuring
General Motors and Chrysler”, Journal of Economic Perspectives, Vol. 29/2, pp. 3-24,
https://doi.org/10.1257/jep.29.2.3.

[43]

Gourdon, J. and J. Messent (2017), “How government procurement measures can affect trade”,
OECD Trade Policy Papers, Vol. 199.

[18]

Harrison, A. et al. (2019), “Can a Tiger Change Its Stripes? Reform of Chinese State-Owned
Enterprises in the Penumbra of the State”, NBER Working Paper Series, No. 25475, National
Bureau of Economic Research, Cambridge, MA, https://doi.org/10.3386/w25475.

[7]

Hsieh, C., C. Bai and Z. Song (2019), “Special Deals with Chinese Characteristics”, NBER
Working Paper Series, No. 25839, National Bureau of Economic Research, Cambridge, MA,
https://doi.org/10.2139/ssrn.3391506.

[32]

IEA (2020), World Energy Investment 2020, International Energy Agency, Paris.

[50]

IMF (2016), “Resolving China’s Corporate Debt Problem”, IMF Working Papers, No. 16/203,
International Monetary Fund, Washington DC.

[39]

IMF et al. (2022), Subsidies, Trade, and International Cooperation, International Monetary Fund,
Organisation for Economic Co-operation and Development, World Bank, World Trade
Organization.

[4]

IMF and The World Bank (2017), People’s Republic of China Financial Sector Assessment
Program: Detailed Assessment of Observance, Basel Core Principles for Effective Banking
Supervision, International Monetary Fund and the World Bank Group, Washington DC.

[41]

Kauko, K. (2020), “The vanishing interest income of Chinese banks”, BOFIT Discussion Papers,
No. 2/2020, Bank of Finland, Helsinki.

[33]

Ker, M. (2017), China’s High-Speed Rail Diplomacy, Staff Research Report, U.S.-China
Economic and Security Review Commission.

[22]

Kowalski, P. and D. Rabaioli (2017), “Bringing together international trade and investment
perspectives on state enterprises”, OECD Trade Policy Papers, No. 201, OECD Publishing,Paris, https://doi.org/10.1787/e4019e87-en.

[1]

Kratz, A. and J. Oertel (2021), Home advantage: How China’s protected market threatens
Europe’s economic power, European Council on Foreign Relations.

[65]

Lam, W., M. Rodlauer and A. Schipke (2017), Modernizing China: Investing in SoftInfrastructure, International Monetary Fund, Washington DC,
https://doi.org/10.5089/9781513539942.071.

[31]

OECD TRADE POLICY PAPER N°282 © OECD 2024

54 
Lardy, N. (2019), The State Strikes Back: The End of Economic Reform in China?, Peterson
Institute for International Economics, Washington DC.

[15]

Levinsohn, J. and A. Petrin (2003), “Estimating Production Functions Using Inputs to Control for
Unobservables”, Review of Economic Studies, Vol. 70/2, pp. 317-341,
https://doi.org/10.1111/1467-937X.00246.

[26]

Lin, L. (2017), “A Network Anatomy of Chinese State-Owned Enterprises”, World Trade Review,Vol. 16/4, pp. 583-600, https://doi.org/10.1017/S1474745617000210.

[61]

Lin, Y., Y. Qin and Z. Xie (2021), “Does foreign technology transfer spur domestic innovation?
Evidence from the high-speed rail sector in China”, Journal of Comparative Economics,
Vol. 49/1, pp. 212-229, https://doi.org/10.1016/j.jce.2020.08.004.

[21]

Luong, N., Z. Arnold and B. Murphy (2021), Understanding Chinese Government GuidanceFunds: An Analysis of Chinese-Language Sources, Center for Security and Emerging
Technology.

[62]

Matuszak, P. and B. Kabaciński (2021), “Non-commercial goals and financial performance ofstate-owned enterprises – some evidence from the electricity sector in the EU countries”,
Journal of Comparative Economics, Vol. 49/4, pp. 1068-1087,
https://doi.org/10.1016/j.jce.2021.03.002.

[51]

Mercier, F. and L. Giua (2023), “Subsidies to the steel industry: Insights from the OECD datacollection”, OECD Science, Technology and Industry Policy Papers, No. 147, OECD, Paris.

[60]

Myers, S. (2003), “Financing of Corporations”, in Constantinides, G., M. Harris and R. Stulz(eds.), Handbook of the Economics of Finance, Elsevier, https://doi.org/10.1016/S15740102(03)01008-2.

[25]

Myers, S. (2001), “Capital Structure”, The Journal of Economic Perspectives, Vol. 15/2, pp. 81102.

[24]

Naughton, B. (2021), The Rise of China’s Industrial Policy: 1978 to 2020, Universidad Nacional
Autónoma de México.

[46]

O’Connor, S. (2019), How Chinese Companies Facilitate Technology Transfer from the UnitedStates, U.S.-China Economic and Security Review Commission, Washington DC.

[14]

OECD (2023), “Government support in industrial sectors: A synthesis report”, OECD Trade
Policy Papers, No. 270, OECD, Paris.

[5]OECD (2023), “Measuring distortions in international markets: Below-market energy inputs”,
OECD Trade Policy Papers, No. 268, OECD, Paris.

[3]

OECD (2023), “Measuring distortions in international markets: The rolling-stock value chain”,
OECD Trade Policy Papers, No. 267, OECD, Paris.

[16]

OECD (2022), As energy price hikes persist, better targeting of support becomes imperative,
OECD Policy Responses on the Impacts of the War in Ukraine, Paris.

[53]

OECD (2022), OECD Economic Surveys: China 2022, OECD Publishing, Paris,
https://doi.org/10.1787/b0e499cf-en.

[38]

OECD TRADE POLICY PAPER N°282 © OECD 2024

 55
OECD (2021), COVID-19 emergency government support and ensuring a level playing field on
the road to recovery, OECD Policy Brief, Paris.

[54]

OECD (2021), Fostering Economic Resilience in a World of Open and Integrated Markets: Risks,
Vulnerabilities and Areas for Policy Action, Report prepared by the OECD for the 2021 UK
Presidency of the G7, Paris.

[45]

OECD (2021), “Measuring distortions in international markets: Below-market finance”, OECD
Trade Policy Papers, No. 247, OECD Publishing, Paris, https://doi.org/10.1787/a1a5aa8a-en.

[2]

OECD (2021), The promotion of competitive neutrality by competition authorities, OECD Global
Forum on Competition Discussion Paper.

[17]

OECD (2019), “Measuring distortions in international markets: The aluminium value chain”,
OECD Trade Policy Papers, No. 218, OECD Publishing, Paris,
https://doi.org/10.1787/c82911ab-en.

[29]

OECD (2019), “Measuring distortions in international markets: The semiconductor value chain”,
OECD Trade Policy Papers, No. 234, OECD Publishing, Paris,
https://doi.org/10.1787/8fe4491d-en.

[23]

OECD (2019), OECD Economic Surveys: China 2019, OECD Publishing, Paris,
https://doi.org/10.1787/eco_surveys-chn-2019-en.

[42]

Owen, B., S. Sun and W. Zheng (2008), “China’s Competition Policy Reforms: The Antimonopoly
Law and Beyond”, Antitrust Law Journal, Vol. 75.

[11]Pan, F., F. Zhang and F. Wu (2021), “State-led Financialization in China: The Case of theGovernment-guided Investment Fund”, The China Quarterly, Vol. 247, pp. 749-772,
https://doi.org/10.1017/S0305741020000880.

[47]

Poncet, S., W. Steingress and H. Vandenbussche (2010), “Financial constraints in China: Firmlevel evidence”, China Economic Review, Vol. 21/3, pp. 411-422,
https://doi.org/10.1016/j.chieco.2010.03.001.

[9]

Rubini, L. and T. Wang (2020), “State-Owned Enterprises”, in Handbook of Deep Trade
Agreements, The World Bank, https://doi.org/10.1596/978-1-4648-1539-3_ch16.

[68]

Ru, H. (2018), “Government Credit, a Double-Edged Sword: Evidence from the China
Development Bank”, The Journal of Finance, Vol. 73/1, pp. 275-316,
https://doi.org/10.1111/jofi.12585.

[10]

Sims Gallagher, K. (2006), “Foreign Technology in China’s Automobile Industry: Implications forEnergy, Economic Development, and Environment”, China Environment Series, Vol. 6.

[67]Song, L. (2018), “State-owned enterprise reform in China: Past, present and prospects”, in
Garnaut, R., L. Song and C. Fang (eds.), China’s 40 Years of Reform and Development:
1978–2018, ANU Press,
https://www.jstor.org/stable/j.ctv5cgbnk.27?seq=1#metadata_info_tab_contents (accessed on
27 June 2019).

[13]

Sykes, A. (2021), “The Law and Economics of “Forced” Technology Transfer and Its Implications
for Trade and Investment Policy (and the U.S.–China Trade War)”, Journal of Legal Analysis,Vol. 13/1, pp. 127-171, https://doi.org/10.1093/jla/laaa007.

[20]

OECD TRADE POLICY PAPER N°282 © OECD 2024

56 
The World Bank (2020), COVID-19 and Non-Performing Loan Resolution in the Europe andCentral Asia region: Lessons learned from the global financial crisis for the pandemic, Policy
Note, The World Bank Group.

[40]

Turner, G., N. Tan and D. Sadeghian (2012), The Chinese Banking System, Bulletin, Reserve
Bank of Australia.

[35]

WEF (2023), Aluminium for Climate: Exploring pathways to decarbonize the aluminium industry,World Economic Forum.

[57]

Wei, Y., Y. Ang and N. Jia (2023), “The Promise and Pitfalls of Government Guidance Funds in
China”, The China Quarterly, Vol. 256, pp. 939-959,
https://doi.org/10.1017/S0305741023000280.

[49]

WTO (2018), Trade Policy Review of China, WT/TPR/S/375, World Trade Organization.

[64]

Zenglein, M. and A. Holzmann (2019), “Evolving Made in China 2025: China’s industrial policy inthe quest for global tech leadership”, MERICS Papers on China, No. 8, Mercator Institute for
China Studies.

[34]

Zheng, W. (2023), “The Chinese Antitrust Paradox”, The University of Chicago Business Law
Review, Vol. 2/2.

[12]OECD TRADE POLICY PAPER N°282 © OECD 2024

 57

Annex A. The OECD’s MAGIC database

The OECD MAGIC (MAnufacturing Groups and Industrial Corporations) database is a confidential firmlevel database combining basic financial and economic data and estimates of government support at thelevel of each industrial group covered. It is meant to help improve understanding of the scope and scale ofgovernment support in manufacturing and to enable analysis of how this support affects firms’ decisions
and markets.
The database covers more than 450 firms of the world’s largest manufacturing groups across 14 key
industrial sectors and over the period 2005-22 (Table A A.1). For each sector, the firm sample is selectedstarting from the top firms by revenue or capacity such that the resulting coverage accounts for at least
two-thirds of global sales or capacity. The geographical origin of firms in each sector is therefore largely
determined by which jurisdictions occupy relatively large shares of global production. Additional efforts arealso made to actively diversify the firm sample, e.g. in cases where entire economies are top producers ina given sector but do not necessarily have companies large enough individually to feature in the top 20 or
30 firms.
The OECD MAGIC database seeks to avoid overlap with other areas of existing OECD work such as
government support for agriculture and fossil-fuel subsidies, thus excluding much of the mining andresources sectors. It focuses on those industrial sectors that produce either durable goods (e.g. capital
goods) or industrial raw materials (e.g. aluminium, steel, and chemicals). Preference is given to products
destined for other businesses (B2B), with the notable exception of automobiles, which are purchased byboth businesses and final consumers. The resulting choice of sectors is as follows: aerospace & defence;aluminium; automobile; cement & building materials; chemicals; fertilisers; glass, ceramics & refractories;
semiconductors; shipbuilding; solar photovoltaic panels; steel; telecommunications network equipment;rolling stock & signalling; and wind turbines.

Table A A.1. Overview of the OECD MAGIC database’s firm sample
SectorAERO

Number of firms
40

%
9%

China

Home base of firms

Number of firms
129

%
28%

ALUM
AUTO
CEMT
CHEM

38
37
38
69

8%
8%
8%
15%

EU-27
United States
Other OECD
Japan

79
74
40
38

17%
16%
9%
8%

FERT
GLAS
SEMI
SHIP

32
32
36
21

7%
7%
8%
5%

India
Korea
Russia
ASEAN

21
17
15
12

5%
4%
3%
3%

SOLA
STEE
TELC
TRAN

23
47
10
26

5%
10%
2%
6%

GCC
Rest of the world
Chinese Taipei
Brazil

12
11
8
6

3%
2%
2%
1%

WIND
Total

13
462

3%
100%

Total

462

100%

Source: OECD MAGIC database, as of May 2024.

As of May 2024, the OECD MAGIC database includes estimates of government support taking the form ofgovernments grants, corporate income-tax concessions, and below-market borrowings. Estimates forgovernment grants are generally obtained directly from corporate disclosures (or more rarely government
sources) and not subject to assumptions or adjustments. Estimates for tax concessions are normally basedon corporate disclosures but can at times involve judgment and interpretation on the part of the OECD
when quantifying the amount of tax savings that companies enjoy as a result of particular tax provisions
OECD TRADE POLICY PAPER N°282 © OECD 2024

58 (e.g. a preferential rate of tax for certain subsidiaries of a company). Estimates for below-market
borrowings, on the other hand, involve complex calculations and assumptions by the OECD given the lackof government and corporate disclosure on the subsidy component of firms’ borrowings.
To calculate below-market borrowings, the OECD first seeks to assess the terms and conditions that would
normally prevail in credit markets given a borrower’s financial profile. This involves replicating the interest
rate that non-state investors could have charged to a given corporate borrower in credit markets using
information obtained from corporate disclosures and corporate bond markets. Benchmark interest rates
for debt transactions are thus constructed by incrementally adding: a risk-free base rate; spreads thatreflect the credit risk of borrowers; and, where applicable, the additional spreads that borrowers would
have incurred absent a government guarantee (OECD, 2021[2]).100 This follows established financial
principles commonly practiced by commercial lenders.
The OECD MAGIC database does not yet cover the support conferred to companies in the form of belowmarket equity, which could be included in future updates. Other forms of support not covered in the OECDMAGIC database include the provision of land and energy inputs at below-market prices.

100 In the latter case, for companies whose credit ratings are raised due to the expectation of government support by

rating agencies, markets usually price their risk spreads based on all-in credit ratings, taking into account any notch
uplift resulting from expected government support. Put differently, the resulting market spreads may not convey
companies’ original standalone ratings and thus their true financial health. It is, however, important, especially in thecontext of subsidy discussions, to take into consideration such effect of implicit government support due to its potential
trade implications. In this respect, the WTO Agreement of Subsidies and Countervailing Measures provides that a firm
receives a ‘benefit’ within the meaning of the Agreement corresponding to the difference between the amount that thefirm pays on a loan guaranteed by the government and the amount that the firm would pay on a comparable commercial
loan absent the government guarantee.

OECD TRADE POLICY PAPER N°282 © OECD 2024 59

Annex B. Additional figures and tables
Table A B.1. Top 10 sampled companies by revenue (2022) in each key industrial sector covered
Sector ranking
1

Aerospace & defence
Firm name
AVIC

Govt ownership
100.0%

Sector ranking
1

Aluminium
Firm name
ChalcoGovt ownership
31.9%

Sector ranking
1

Automobile
Firm name
VW

Govt ownership
11.8%

2
3
4
5

BoeingAirbus
RTX
Lockheed-Martin

0.0%
25.9%
0.0%
0.0%

2
3
4
5

Hindalco
Hydro
China Hongqiao
Rio Tinto

9.6%
40.7%
12.7%
0.0%

2
3
4
5

ToyotaStellantis
Ford
Daimler-Benz

0.0%
6.3%
0.0%
0.0%

6
7
8
9

GE
SafranRolls Royce
Leonardo

0.0%
11.2%
0.0%
30.2%

6
7
8
9

Rusal
Alcoa
Emirates Global Aluminium
Constellium

0.0%
0.0%
100.0%
11.4%

6
7
8
9

BMW
General Motors
Honda
Hyundai

0.0%
0.0%
0.0%
7.1%

10

SPIC

100.0%

10

SAIC

80.5%

10

Honeywell
0.0%
Cement & building materials
Sector ranking
Firm name
Govt ownership
1
CNBM
39.2%
2
CRH
0.0%

Sector ranking
1
2

Chemicals
Firm name
BASF
Reliance34
5
6LafargeHolcim
HeidelbergCement
Anhui Conch
SCG

0.0%
0.0%
40.7%
33.6%

3
4
5
6

ChemChina
Dow Chemical
Bayer
SABIC

7
8
9
10

Cemex
UltraTech Cement
Martin Marietta
Taiheiyo

0.0%
3.9%
0.0%
0.0%

7
8
9
10

LyondellBasell
Rongsheng Petrochemical
LG Chem
3M

OECD TRADE POLICY PAPER N°282 © OECD 2024

Govt ownership
0.0%
6.6%

Sector ranking
1
2

Fertilisers
Firm name
NutrienMosaic100.0%
0.0%
0.0%
70.0%

3
4
5
6

OCP
CF Industries
Yunnan Yuntianhua
ICL

94.1%
0.0%
38.1%
1.0%

0.0%
0.0%
7.5%
0.0%

7
8
9
10

OCI
PhosAgro
IFFCO
Ma’aden

0.0%
0.0%
0.0%
65.4%

Govt ownership
0.0%
0.0%

60 

Sector ranking

Glass and ceramics
Firm name

Govt ownership

Sector ranking

Semiconductors
Firm name

Govt ownership

Sector ranking

Shipbuilding
Firm name

Govt ownership

1
2
3
4

Saint Gobain
AGC
Corning
NSG

4.3%
0.0%
0.0%
0.0%

1
2
3
4

Samsung Electronics
TSMC
Intel
Qualcomm

7.7%
6.4%
0.0%
0.0%

1
2
3
4

CSSC
KSOE
Fincantieri
Samsung Heavy Industries

100.0%
5.0%
71.3%
9.2%

5
6
7
8

Sisecam
KyoceraImerysMohawk Industries

0.0%
0.0%
0.0%
0.0%

5
6
7
8

SK Hynix
Broadcom
MicronNvidia

7.2%
0.0%
0.0%
0.0%

5
6
7
8

DSME
Yangzijiang
Imabari
JMU

62.1%
0.0%
0.0%
0.0%

9
10

AMD
ASE

0.0%
0.0%

9
10

9
10

Fuyao
2.2%
RHI Magnesita
0.0%Solar photovoltaic panels
Sector ranking
Firm name
Govt ownership

Sector ranking

Steel
Firm name

Govt ownership

Oshima0.0%
Namura0.0%
Telecommunications network equipment
Sector ranking
Firm name
Govt ownership

1
2
3
4

LONGi
Trina Solar
JinkoSolar
JA Solar

10.2%
19.0%
0.0%
0.0%

1
2
3
4

China Baowu Steel
ArcelorMittal
POSCO
Nippon Steel

100.0%
0.0%
9.1%
0.0%

1
2
3
4

Huawei
Cisco
Ericsson
Nokia

0.0%
0.0%
0.0%
5.3%

5
6
7
8

Hanwha Solutions
Canadian Solar
Chint Electrics
Risen

9.9%
0.0%
0.0%
6.8%

5
6
7
8

HBIS
Ansteel Group
Nucor
Shougang Group

100.0%
100.0%
0.0%
100.0%

5
6
7
8

NEC
Fujitsu
ZTE
Juniper

0.0%
0.0%
25.4%
0.0%

9
10

First Solar
GCL System

0.0%
13.3%

9
10

JFE Steel
Shandong Steel Group0.0%
100.0%

9

Ciena

0.0%

OECD TRADE POLICY PAPER N°282 © OECD 2024 61

Sector ranking

Rolling stock & signalling
Firm name

Govt ownership

Sector ranking

Wind turbines
Firm name

Govt ownership

1
2
3
4

CRRC
AlstomSiemens
Wabtec

55.5%
0.0%
0.0%
0.0%

1
2
3
4

VestasGE
Siemens Gamesa
Goldwind

0.0%
0.0%
0.0%
25.9%

5
6
7
8

CRSC
Transmashholding
Stadler
Knorr Bremse

64.3%
0.0%
0.0%
0.0%

5

Nordex

0.0%

9
10

CAF
Greenbrier

0.0%
0.0%

Note: Government ownership comprises ownership by public pension funds and public investment banks as of 2022. For conglomerates, the ranking only considers segment-specific revenue(e.g. semiconductor-related revenue for Samsung Electronics). The ranking is missing certain large companies based in Russia, which have stopped disclosing their financials to the public following Russia’s
large-scale invasion of Ukraine. This notably affects the fertiliser sector. A few large shipyards and other firms based in China could not be covered either due to lack of data and information.
Source: OECD MAGIC database.

OECD TRADE POLICY PAPER N°282 © OECD 2024

62 

Figure A B.1. State enterprises in the sample have grown faster than private peers
Growth in firms’ assets and revenue over 2010-21, 2010 = 100
Revenue growth, 2010 = 100

Asset growth, 2010 = 100

250

200

150

100

50

0

Government ownership <10%

Government ownership >=10% &<25%

Government ownership >=25% &<50%Government ownership >=50%

Note: Growth rates are calculated for the period 2010-21 since several state enterprises were not active in the sectors covered prior to 2010.
Data are also at times missing between 2005-07. The finding that state enterprises have grown faster than private peers holds, however,irrespective of the reference year.
Source: OECD MAGIC database.

Table A B.2. Cement and automobiles are two sectors where government ownership seemingly
correlates positively with financial performance
Average return on assets by sector and ownership category, segment specific
Government ownership <33%
15.8%

Government ownership >=33%
3.1%

Aluminium
Automobile
Cement & building materials
Chemicals

4.8%
2.7%
5.9%
7.9%

3.2%
7.9%
9.9%
6.7%

Fertilisers
Glass & ceramics
Semiconductors
Shipbuilding

12.0%
5.0%
12.0%
2.4%

8.3%
1.1%
3.2%
2.4%

Solar PV panels
Steel
Telecom network equipment
Rolling stock & signalling

3.5%
6.4%
7.6%
7.8%

n.a.
3.0%
n.a.
4.8%

Wind turbines

4.1%

1.2%

Aerospace & defence

Note: Because not all sectors feature firms falling within each of the four government-ownership categories investigated in this report, this table
uses a simpler 33% ownership threshold. Using 25% instead does not invalidate the findings.
Source: OECD MAGIC database.

OECD TRADE POLICY PAPER N°282 © OECD 2024

 63

Figure A B.2. State enterprises tend to be more leveraged than their private peersStandardised debt-equity ratios
Weighted average

Simple average

0.1

0.1

0.08

0.08

0.06

0.06

0.04

0.04

0.02

0.02

0

0

-0.02

-0.02

-0.04

Government
ownership <10%

Government
Government
ownershipownership>=10% & <25% >=25% & <50%

Government
ownership
>=50%

-0.04

Government
ownership <10%

Government
Government
ownershipownership>=10% & <25% >=25% & <50%

Government
ownership>=50%

Note: Debt-equity ratios are here standardised for each sector so they have a mean of zero and a standard deviation of one.
Source: OECD MAGIC database.

Figure A B.3. Interest coverage appears worse once accounting for subsidies
Ratio of firms’ interest expenses over their EBITInterest coverage (no subsidies)Interest coverage (with subsidies)

80
70
60
50

40
30
20
10

0
-10

Government ownership <10%

Government ownership >=10% &<25%

Government ownership >=25% &<50%Government ownership >=50%

Note: This graph only considers government grants and below-market borrowings, thus omitting below-market inputs for which only few data
points exist. Readers are advised that the counterfactual of no subsidies shown here is purely hypothetical and does not represent what would
actually happen were subsidies to be removed.
Source: OECD MAGIC database.

OECD TRADE POLICY PAPER N°282 © OECD 2024

64 Annex C. State enterprises can fall outside the scope of competition rules
in countries of the Gulf Cooperation Council
Bahrain: The Bahrain competition law (Law No. 31 of 2018 Concerning Promotion and Protection ofCompetition) exempts facilities and projects owned or controlled by the state from the application ofcompetition rules [Article 2(b)].
Kuwait: The Kuwait competition law [Protection of Competition Law (Law No. 72 of 2020)] exempts fromthe application of competition rules activities of public utilities and state-owned companies that provide
basic goods and services to the public and which are determined by a decision of the Council of Ministers(Article 3).
Oman: The Oman competition law [Competition Protection and Monopoly Prevention Law promulgatedunder the Royal Decree No. 67 of 2014 (as amended by Royal Decree 22 of 2018)] exempts from theapplication of competition rules activities relevant to the public facilities fully owned or controlled by Oman(Article 6).
Qatar: The Qatar competition law (Law No. 19 of 2006 Concerning the Protection of Competition and thePrevention of Monopoly Practices) exempts from the application of competition rules state ventures andinstitutions, groups, companies, or entities subject to State direction and supervision (Article 6).
Saudi Arabia: The Saudi Arabia competition law [Cabinet Resolution No. 372 of 1440H Promulgating theCompetition Law of the Kingdom of Saudi Arabia (Royal Decree No. (M/75) of 1440H) and Implementing
Regulations issued by Resolution No. (337) of 25/1/1441H] exempts from the application of competition
rules Public establishments and State-owned entities where they grant exclusive rights by the government
to provide goods or services in a certain field [Article 3(2) and Article 4(1) of the Implementing Regulations].
Such public establishments and state-owned entities are also exempt from reporting economic
concentration transactions to Committee for Adjudication of Competition Law Violations [Article 4(3) of the
Implementing Regulations].
Prior to the 2019 competition law, the legal framework in place (Competition Regulation of 2014) envisaged
a broad exemption from the application of competition rules for public establishments and companies
wholly owned by the government. Under the new legislation, such exemption must be granted by a royal
decree or a resolution of the Council of Ministers authorising the relevant public establishment or stateowned company to be the sole provider of goods or services in a particular field. By contrast, competition
law applies in Saudi Arabia to non-wholly SOE, as well as to SOEs in fields other than the one in which it
is solely authorised by the Saudi Government to provide goods or services [Article 4(1) of the Implementing
Regulations].
United Arab Emirates: The competition law of the United Arab Emirates (Federal Law No. 4 of 2012
concerning the Regulation of Competition as amended by Federal Decree-Law No. 36 of 2023 Regulating
Competition) exempts from the application of competition rules actions of undertakings owned by theFederal Government based on a Cabinet resolution upon the Minister of Economy’s proposal and after
coordination with the relevant authority, as well as undertakings owned by a government of an emirate,
which carry out their activities in such emirate, as determined by a local government’s resolution.
Prior to the 2023 amendment, the legal framework in place envisaged a broad exemption from theapplication of competition rules for public establishments and enterprises owned by the federal government
or emirate government (Article 2 of Federal Law No. 4 of 2012).

OECD TRADE POLICY PAPER N°282 © OECD 2024 65

Annex D. Large central state enterprises have emerged in China since 2012
following a consolidation wave initiated by the SASAC
The following table summarises M&As in China involving at least one central SE101 in the manufacturingsector, which have taken place since 2012. Among these M&As, seven led to the emergence of a newcentral SE:

Table A D.1. Manufacturing M&As in China involving at least one central SE since 2012
Year

SectorAcquired company or merging entities

2013

Heavy Machinery

China National Erzhong Group2014

Aircraft2015

Rolling stock

2015
2016

MetalsSteel

2016

Cement2017

Heavy Machinery and Textiles

Shenyang Aircraft Industry Group Co. (military branchof Aviation Industry Corporation of China (AVIC)CNR Corporation
CSR Corporation
China Metallurgical Group Corporation
Baoshan Iron and Steel Group (Baosteel)
Wuhan Iron and Steel Corporation
China National Building Materials Group Corporation
China National Materials Group Corporation (Sinoma)
China High-Tech Group2018

Shipbuilding

2018
2018

Telecommunication equipment
and networking provider a
Aluminium

2019
2019
2020
2020
2020
2021
2021
2021
2021

Steel
Aluminium
Steel
Steel
Steel
Steel
Steel
IT equipment
Rare earths

2021

Oils and Chemicals

2022
2022
2023

Steel
Aluminium
Steel

China State Shipbuilding Corporation (CSSC)
China Shipbuilding Industry Group Corporation Ltd(CSIC)
FiberHome Technologies Group
Datang Telecom Technology and Industry Group
Yunnan Metallurgical Group controlling Yunnan
Aluminium Co. Ltd.
Yunnan Aluminium Co. Ltd
Maashan Iron & Steel Group
Yunnan Aluminium
Taiyuan Iron & Steel Group (TISCO)
SinosteelChongqing Changshou Iron and Steel Co. Ltd.
Kunming Iron & Steel Holding Co. Ltd.
Benxi SteelChina Putian Information Industry Group (Potevio)
Aluminium Corporation of China (CHALCO) (rareearth units)
China Minmetals Corporation (rare earth units)
Ganzhou Rare Earth Group Co. Ltd (rare earth units)
ChemChina
Sinochem
Xinyu Iron and Steel (Xingang Group)
Yunnan Aluminium
Shandong Iron and Steel Group (Shangang Group)

Acquiring company or newly created entity
China National Machinery Industry
Corporation (Sinomach)
Sichuan Chengfei Integration Technology
Corp.
China Railway Rolling Stock Corporation(CRRC)
China Minmetals Corporation
Baowu Steel Group (Baowu)
China National Building Materials
China National Machinery Industry(Sinomach)
China Shipbuilding Group

China Information and Communication
Technologies Group Corporation
China Copper Co., a joint venture between
Chinalco and the Yunnan provincial
government
Baowu Group
Chalco Aluminium Corp of China Ltd
Baowu Group
Baowu Group
Baowu Group
Baowu Steel Group Corp. Ltd.
AnsteelChina Electronics Technology Group (CETG)
China Rare Earth Group Co. Ltd.

Sinochem Holdings Corp.
Baowu Group
Chalco Aluminium Corp. of China Ltd
Baowu Group

Source: OECD research.

101 Central SEs refer in China to enterprises owned and administered by the SASAC at the national level.

OECD TRADE POLICY PAPER N°282 © OECD 2024

66 Annex E. Mergers conditionally approved in China by the SAMR since 2021
The table below lists the mergers conditionally approved in China by the SAMR since 2021 and how they
have been assessed by the competition authorities in other major jurisdictions (i.e. the EU, Japan, Korea,
the United States, and the United Kingdom). It shows that out of the nine transactions examined by boththe SAMR and at least one other competition authority, only three were also approved conditionally by atleast one other competition authority.

Table A E.1. Mergers conditionally approved in China by the SAMR since 2021
Country of originof the parties
involved

SAMR
Assessment

Assessment by othercompetition authorities (if filed)

United States

Conditionallyapproved

Pharmaceuticals

China

Conditionallyapproved

Conditionally approved in theEuropean Union, Korea,
unconditionally approved in the
United Kingdom
N.A. (the transaction was not filed
in another jurisdiction)

Semiconductors

United States; UnitedStates/Chinese Taipei
China (local SEs)

Conditionallyapproved
Conditionallyapproved
Conditionallyapproved

Year

Case

Industry

2023

Broadcom/VMware

Semiconductors

2023
2023

Simcere Pharmaceutical
Group/Beijing Tobishi
Pharmaceutical
MaxLinear/Silicon Motion

2023

Wanhua Chemical/Yantai Juli

Chemicals

2022

Korean Air/Asiana Airlines

Transportation(aviation)

Korea

2022

Shanghai Airport/Eastern Air
Logistics JVTransportation(aviation)

2022

II-VI/Coherent

Semiconductors

China (local SE withthe subsidiary of acentral SE)
United States

2022

AMD/Xilinx

Semiconductors

United States

2022

GlobalWafers/Siltronic

Semiconductors

Chinese Taipei;
Germany

Conditionallyapproved

2021

SK Hynix/Intel

Semiconductors

Korea; United States

Conditionallyapproved

2021

Illinois Tool Works/MTS

Industrials

United States

2021

Danfoss/Eaton

Industrials

Denmark; Ireland

Conditionallyapproved
Conditionallyapproved

2021

Cisco/Acacia

Semiconductors

United States

Conditionallyapproved
Conditionallyapproved
Conditionallyapproved

Conditionallyapproved

Unconditionally approved in the
United States
N.A. (the transaction was not filed
in another jurisdiction)
Conditionally approved in theEuropean Union, Japan, Korea,
and in the United Kingdom
N.A. (the transaction was not filed
in another jurisdiction)
Unconditionally approved in the
United States, and Korea
Unconditionally approved in theEuropean Union, Korea, the United
Kingdom, and the United States
Unconditionally approved in Japan,
Korea, the United States; noinvestigation by the United
Kingdom
Unconditionally approved in theEuropean Union Korea, the United
Kingdom, and the United States
N.A. (the transaction was not filed
in another jurisdiction)
Conditionally approved in Brazil,
the European Union and theUnited States
Unconditionally approved in the
United States

Source: Authors’ elaboration based on the SAMR website, www.samr.gov.cn/fldes/tzgg/ftj/index.html (accessed on 16 February 2024), as wellas https://globalcompetitionreview.com/guide/the-guide-merger-remedies/fifth-edition/article/china-recent-remedy-cases-showcase-impact-ofamended-anti-monopoly-law#footnote-017 (accessed on 16 February 2024).

OECD TRADE POLICY PAPER N°282 © OECD 2024 67

Annex F. List of sampled banks covered in Section 3.1.2 of this report
Policy banks, China••

China Development bank
The Export-Import Bank of China

State-owned large commercial banks, China
•
•
•
•
•
•

Industrial and Commercial Bank of China Limited
Agricultural Bank of China Limited
Bank of China Limited
China Construction Bank Corporation
Bank of Communications Co., Ltd.
Postal Savings Bank of China Co., Ltd.

Joint-stock commercial banks, China
•
•
•
•
•
•
•
•
•
•
•

China Bohai Bank Co., Ltd.
China CITIC Bank Corporation Limited
Shanghai Pudong Development Bank Co., Ltd.
Huaxia Bank Co., Limited
China Merchants Bank Co., Ltd.
Industrial Bank Co., Ltd.
China Minsheng Banking Corp., Ltd.
China Everbright Bank Company Limited
Ping An Bank Co. Ltd.
China Zheshang Bank Co., Ltd.
China Guangfa bank Co., Ltd.

City commercial and rural banks, China
•
•
•
•
•

Bank of Beijing Co., Ltd
Bank of Jiangsu
Bank of Shanghai Co., Ltd
Bank of Ningbo Co. Ltd.
Chongqing Rural Commercial Bank Co., Ltd.

Other Top 10 globally largest banks
•
•
•
•
•
•

JP Morgan Chase & Co.
Bank of America Corporation
Mitsubishi UFJ Financial Group Inc.
HSBC Holdings PLC
BNP Paribas SA
Crédit Agricole GroupOECD TRADE POLICY PAPER N°282 © OECD 2024

68 

Annex G. The lack of a harmonised definition of NPLs across countries limits
meaningful cross-country comparisons
There is no uniform definition of NPLs nor harmonised criteria across countries for classifying a loan as
non-performing (The World Bank, 2020[40]).102 National competent regulatory authorities typically differ in
how they define NPLs, thus making this concept a regulatory rather than an accounting one. 103 As a result,a comparative exercise that does not account for jurisdiction-specific definitions may lead to inaccurate
cross-country comparisons of credit quality in each economy’s banking sector.
Despite the absence of an international standard definition, some commonalities may be found acrossjurisdictions. Such commonalities are notably reflected in the guidelines of the Basel Committee on
Banking Supervision (BCBS) published in 2017. National regulatory authorities frequently use the 90-day
overdue threshold to classify a loan as non-performing, although this threshold is not universal. In the
United States, for instance, NPLs are defined as loans past due for more than 90 days and non-accrualloans (i.e. loans on which a bank has ceased to accrue interest). Similarly, the European Banking Authority(EBA), which issued guidelines in 2014 on the definitions and management of non-performing exposuresand forbearance within the European Union,104 refers to the quantitative criterion of 90 days overdue toconsider a loan and other exposures as non-performing. In addition, prior to the Asian financial crisis of
the late 1990s, various Asian economies considered loans as non-performing only when they had
exceeded a 180-day past due threshold. Since then, however, most regulators in Asia (e.g. in Hong-Kong,
China and Chinese Taipei) have tightened their definitions of NPLs: by adopting a 90-day threshold, they
have aligned themselves with other jurisdictions, ensuring a more adequate disclosure of their credit
quality.105
Moreover, a loan that is past due for less than 90 days is nevertheless commonly identified as nonperforming where it is likely that the borrower will not be able to repay the loan in full. According to the EBA
guidelines, for instance, overdue loans that have not yet attained the 90-day threshold may still beclassified as non-performing if there is evidence that full repayment of principal and interest is unlikely
without resorting to collateral, irrespective of whether a loan is in arrears.106
By contrast, in mainland China, although the CBRC adopted in 2004 a standard five-category loanclassification system, which was also in use in some Latin American and Asian countries107, the Chinese
regulator did not seemingly set a mandatory 90-day threshold, hence leaving discretion to banks as towhen a loan should be classified as non-performing. In fact, none of the ‘Big six’ banks refer to such athreshold when defining NPLs in their annual reports. The five-category system classifies bank loans
according to their inherent risks as ‘pass’, ‘special-mention’, ‘substandard’, ‘doubtful’, and ‘loss’. Loansbelonging to the last three categories are all considered as non-performing. Table A G.1 below
102 See also www.imf.org/external/pubs/ft/bop/2005/05-29.pdf (accessed on 23 August 2023).
103 See www.frbsf.org/banking/asia-program/pacific-exchange-blog/nonperforming-loan-ratio-asset-quality-

measures-in-asia/ (accessed on 10 August 2023).
104 While the guidelines were issued in 2013, they were endorsed by the European Commission and published in

2014. The EBA revised the guidelines in 2022; see www.eba.europa.eu/regulation-and-policy/credit-risk/guidelineson-management-of-non-performing-and-forborne-exposures (accessed on 20 August 2023). Note that the EBA, alongwith other regulatory authorities, has substituted the term ‘non-performing exposures’ for the concept of NPLs to covera broader range of problem assets, beyond NPLs. The term includes not only NPLs but also non-performing debt
securities and other amounts due (including interest and fees), as well as specific off-balance sheet items (e.g. loan
commitments and financial guarantees).
105 Seewww.frbsf.org/banking/asia-program/pacific-exchange-blog/nonperforming-loan-ratio-asset-qualitymeasures-in-asia/ (accessed on 10 August 2023).
106 Paragraph 213 of Part 2 of Annex V to Commission Implementing Regulation 680/2014/EU.
107 See ‘Guiding Principles on the Classification of Loan Risk’ http://en.people.cn/200309/06/eng20030906_123830.shtml (accessed on 20 August 2023).

OECD TRADE POLICY PAPER N°282 © OECD 2024 69summarises this five-category system. In February 2023, the PBOC tightened its financial-asset risk
classification methods for commercial banks, which should bring it closer to the criteria laid down in the2017 BCBS guidelines.

Table A G.1. The five-category loan classification system in China
Loan typeClassification criteria

Impairment loss

Pass

Borrowers are able to honor the terms of the contracts and there is no reason to doubt their ability to
repay the principal and interest of loans in full and in a timely manner.
Borrowers are able to serve their loans currently, although repayment may be adversely affected by
specific factors.
Borrowers' abilities to service their loans are in question. Borrowers cannot depend on their normal
business revenues to pay back the principal and interest so losses may ensue, even when guarantees
are invoked.
Borrowers cannot pay back the principal and interest in full and significant losses will be incurred, evenwhen guarantees are invoked.
The principal and interest of loans cannot be recovered or only a small portion can be recovered after
taking all possible measures and resorting to necessary legal procedures.

None

Special mention
Sub-standard

DoubtfulLoss

2% provisioning
required
25% provisioning
required
50% provisioning
required
100% provisioning
requiredNote: Loans belonging to the last three categories are all considered as non-performing.
Source: Authors’ elaboration based on http://en.people.cn/200309/06/eng20030906_123830.shtml (accessed on 20 August 2023).

OECD TRADE POLICY PAPER N°282 © OECD 2024

70 

Annex H. Overview of the OECD methodology for identifying SEs disciplines
in PTAsIn earlier work [TAD/TC(2022)9/FINAL], the OECD has mapped and classified the provisions disciplining
SEs included in PTAs signed between the 1950s and December 2022.108 The analysis is based on
information collected on all PTAs currently in force,109 including their dates of signature and entry into force,and the Parties to the agreements. For this purpose, the OECD relied on the WTO database of regional
trade agreements110 although the information was cross-checked with certain national or supra-national
websites, notably those of Australia, Canada, China, Japan, the United States, the European Union, andthe United Kingdom. A total of 367 PTAs111 were identified as being in force. Zooming in on SEs,
information was compiled on whether and how SEs are defined across the various PTAs, the various
provisions establishing a discipline on SEs, and where those provisions could be located within the PTAs.
The OECD considered that a PTA contains discipline on SEs when it establishes a specific framework
regulating the conduct of SEs and, potentially, the relationship of governments with their SEs. It deems
PTAs containing at least one of the following three provisions to have an SE discipline in place, namely(i) the obligation for SEs to act ‘in accordance with commercial considerations’; (ii) the obligation for SEs
to accord non-differential treatment when purchasing and selling goods or services; (iii) the prohibition of
non-commercial assistance provided by governments or SEs to SOEs when causing adverse effects. 112
On some occasions, the OECD regarded as including a discipline on SEs those PTAs that containprovisions regulating more broadly the relationship of governments with their SEs. 113 It should be notedthat additional obligations and transparency requirements often accompany the three main obligations
referred to above. These provisions for which the OECD also collected information, complement the main
provisions regulating SEs and do not appear as stand-alone obligations.
By contrast, for the purpose of this study, a PTA is not considered to include disciplines on SEs when it
only contains either of the two following obligation, namely: (i) a general obligation for Parties to theagreement to comply with the principle of non-discrimination when applying competition laws; or (ii) an
obligation to treat all enterprises equally under competition laws, irrespective of their ownership status. 114
108 This OECD study complements the work of other international organisations, such as the World Bank, which has

inventoried the provisions on SEs in 283 agreements signed between 1957 and early February 2016 to assess thevertical depth of PTAs (Rubini and Wang, 2020[68]). For further details on the different methodology between the twostudies, see below.
109 This includes PTAs that have preliminarily entered into force, such as the Comprehensive Economic and Trade

Agreement between the European Union and Canada (CETA), as well as PTAs that have entered into force albeit not
for all Parties to the agreement.
110 See http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx (accessed on 1 March 2024).
111 This number covers PTAs, which have recently entered into force, although they have not yet been notified to the

WTO. In addition, Protocols to a PTA adding a new chapter on ‘competition policy’ or ‘state-owned enterprises’ havebeen counted as separate agreements to reflect their date of entry into force. Four instances were found in this respect,
namely the upgrade protocol to the China-Singapore FTA, the upgrade protocol to the China-New Zealand FTA, theprotocol amending the China-Chile FTA, and the protocol amending the Singapore-New Zealand Closer Economic
Partnership.
112 Note, as explained above, that the CPTPP, the Australia-Peru FTA and the USMCA contain disciplines on non-commercial assistance to SOEs provided by governments or by SEs. These agreements thus distinguish between
SOEs and SEs. Hence, although this report uses the term SEs, it refers to SOEs when the Agreements underdiscussion contain two separate definitions of SOEs and SEs.
113 Details are provided in section 4.2 as to the number of PTAs containing a discipline on SEs, including in a broader

language, and the number of PTAs containing only one or several of the obligations (i) to (iii).
114 Notwithstanding this approach, relevant data on such provisions were collected. See [TAD/TC(2022)9/FINAL].

OECD TRADE POLICY PAPER N°282 © OECD 2024 71
In that regard, the analysis has adopted a rather conservative approach by classifying as discipline on SEs
only the inclusion of specific rules tailored to the issues to which SEs give rise. That is, although theapplication of general competition laws to SEs may contribute to addressing some of the distortions causedby the conduct and practices of SEs, such provisions do not lay down a framework specifically regulatingSEs. The rationale for this conservative approach is that too broad a categorisation would not give sufficientweight to frameworks imposing substantial obligations on both SEs and governments in their relations with
SEs.

OECD TRADE POLICY PAPER N°282 © OECD 2024

OECD TRADE POLICY PAPERS
This report is published under the responsibility of the OECD Trade Committee.
Any finding of this work is without prejudice to any reviews that may be conducted by investigating
authorities or under the WTO dispute settlement procedures on subsidies and countervailing measures.
This report, as well as any data and any map included herein, are without prejudice to the status of orsovereignty over any territory, to the delimitation of international frontiers and boundaries and to the nameof any territory, city or area.
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities.
The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem
and Israeli settlements in the West Bank under the terms of international law.
Comments are welcome and can be sent to tad.contact@oecd.org.

© OECD (2024)
The use of this work, whether digital or print, is governed by the Terms and Conditions to be found at
http://www.oecd.org/termsandconditions.