April 4, 2006
Dr. Usha C. V. Haley
Director, Global Business Center, University of New Haven
Statement before the U.S.-China Economic and Security Review Commission
Subsidies exist in all industries that the Chinese state and provincial governments considered economically or militarily strategic, including Resource Extraction, Steel, Computing, Software, R & D, Environmental Services and Conservation, and Autos.
The subsidies exist in various forms, including:
Free to Low-cost Loans. The government exercises a vice-like grip on banks, stock markets and bond issuance and these translate to the ability to make grandiose loans. The most extreme statistics in the financial sector deal with loans outstanding. In three years from 2002 to 2004, loans increased by 58 per cent, or $785 billion. In 2003, new lending equaled almost one quarter of gross domestic product (GDP). A credit binge fueled this latest boom. Half of all bank loans go to SOEs. Most of these loans will never be repaid. Huawei for example, has a $10 billion credit line from China Development Bank.
Asset Injections: The SOEs’ parent companies, usually municipal governments or ministries, provide their protégés with opportunities to acquire state-run businesses, such as toll bridges, at highly preferential terms.
No Break-even: Poor bookkeeping practices, and lax bottom-line considerations, grant SOEs freedom from the need to make profits, or to break even.
Subsidized Purchases: SOEs can purchase their components and raw materials below cost and directly from each other, affecting the competitiveness of certain sectors in the global economy. This tradition propelled the Chinese motorcycle industry’s ability to buy control of virtually all Indian motorcycle companies short of Bajaj and turn them into assemblers of Chinese components.
International Bargaining Power: Beijing has used its enormous buying power to intercede for its SOEs with foreign suppliers and to reduce acquisition costs for raw materials. A recent example includes the Chinese government’s aborted attempt to bully down the cost of iron ore for the Chinese steel industry below internationally-negotiated price levels. The Chinese government has also secured contracts and exploration rights abroad for its SOEs.
Labor Controls: The government exercises various methods to control employees including the dang’an or employment dossier; and to reduce labor costs through injection of part-time and migrant workers and the use of prison labor.
Tax Breaks: Many SOEs avoid taxation or reduce it through tax breaks (although this can backfire if a company’s management loses favor).
Energy and Land Subsidies: The state subsidizes gasoline and electricity. Currently, Beijing tightly controls the price of both gasoline and electricity at well below their true economic levels. The state also offers free land and utilities to SOEs and companies in key strategic sectors.
http://www.uscc.gov/hearings/2006hearings/written_testimonies/06_04_04wrts/06_04_04_haley.php
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