What Chinese Subsidies Mean for Investors
How has China managed to surge from less than 2% to about 18% of the global economy in just four decades? Historian Vaclav Smil says one key to China's success is Communist Party control.
China’s ruling party attracts foreign companies and enormous direct investment by guaranteeing the stability of a police state and by supplying a docile workforce that labors with minimum rights, commonly for extended hours under severe discipline, and is housed in substandard conditions.
— Vaclav Smil
The Chinese Communist Party is also anxious to control every important economic sector within its own borders. The result is massive subsidies of local companies in important sectors like electric vehicles.
The European Union found that Chinese carmakers get so much public support that it would take tariffs of more than 17% on every BYD car sold in Europe to level out the playing field.
Relative to GDP, Chinese public support of its companies is about four times higher than in the United States.
Smil might suggest investors pay attention to which sectors are of most interest to the Chinese Communist Party. Whether automobiles or solar panels, these industries are likely to see massive oversupply, price competition, and profit pressure, as Chinese companies use their subsidies to help them compete against foreign competitors.
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