Why the Narrative of China’s Government Subsidies Led to Overcapacity is Also Misguided

Abstract: This report examines the government subsidies received by publicly listed manufacturing companies and explores their relationship with corporate investment. Key characteristics of these subsidies are as follows:

1.Scale: In 2023, total government subsidies for listed manufacturing firms amounted to 158.7 billion yuan, representing less than 1% of total revenue.

2.Growth: After more than a decade of growth, subsidies saw a decline for the first time in 2023, with a further decrease expected in 2024.

3.Industry Distribution: Subsidies are concentrated in the computer, electrical machinery, and automobile manufacturing sectors, shaped by local government fiscal capacity and showing a market-oriented allocation trend.

The report’s findings include:

1.Limited Impact on Investment: Between 2014 and 2023, government subsidy growth accounted for only 5% of the increase in new investments by listed manufacturing companies, while more than 80% was driven by revenue growth.

2.Diminishing Influence Since 2019: The impact of subsidies on corporate investment has diminished further since 2019, with subsidy growth contributing only 1% to capital expenditure between 2019 and 2023, down from 6% between 2014 and 2018.

3.Distinct Role for "New Three" Companies: Companies in emerging industries and technologies (“New Three”) are notably more dependent on government subsidies for investment, with 22% of new investments from 2019 to 2023 driven by subsidy growth.

Based on these findings, the report suggests three policy recommendations:

1.Limited Effectiveness as a Tool: Subsidy policies have limited impact on driving manufacturing investment and should not be relied on as a primary mechanism to stabilize investment.

2.Importance of Inflation Control: Exiting a low-inflation environment could enhance corporate revenue and cash flow, thereby supporting manufacturing investment growth.

3.Reevaluation for "New Three" Companies: Given the dual domestic and international challenges they face, policies supporting “New Three” companies may require a strategic reassessment.