Selling Stuff to Foreigners? An Empirical Investigation of China’s Subsidy of its Exporters

This paper quantifies the aggregate impact of various subsidies enjoyed by China's exporting firms in the electronics and communications equipment manufacturing sectors, which nearly makes up the majority of China's exports. Using firm level data from China’s National Bureau of Statistics for 2007, the peak year for China’s trade surplus, we find that although within some narrowly defined industries exporting firms are enjoying net subsidies compared to nonexporting firms, the extensiveness and pervasiveness of export subsidies is actually much lower than what we initially expected. Out of the 793 narrowly defined subgroups that contain both exporters and non-exporters, less than 40 percent included exporters that received more subsidies than non-exporting firms. Indeed, these subsidized exporters only contributed to approximately 40 percent of China’s total electronics and communications equipment export value. This suggests that the majority of exporters did not receive noticeable subsidies relative to their nonexporting counterparts. Our empirical finding contradicts the common perception that China has been aggressively and indiscriminately subsidizing its exporters across the board. More surprisingly, the recipients of the subsidies are mostly large foreign firms rather than state owned enterprises or domestic firms. Finally, consistent with popular notion, the recipients of subsidies are predominantly large and medium size enterprises instead of the small enterprises that China would like to encourage going forward.