Chinese Government Spent $685 million in Subsidies for New Energy Vehicles 2013-15

Chinese subsidies are an ongoing source of trade friction. How Chinese subsidies contribute to overcapacity in the new energy vehicle (NEV) is therefore a topic of interest. One difficulty in studying this topic lies in the frequent unavailability of official statistics on subsidies. However, relevant information is occasionally released, such as during the investigation of subsidy fraud.

An official investigation of subsidy fraud in the NEV sector in 2016 provides some hard numbers. Chinese press reports indicate that more than half of the Chinese companies producing NEVs were implicated in a range of fraudulent practices to obtain subsidies. In its fraud report, Ministry of Finance (MOF) mentioned that the central government spent 33.4 billion yuan on subsidizing from 2009 to 2015. A private-sector analyst reported that on July 9 2016, State-owned Assets Supervision and Administration Commission (SASAC) statistics showed that from 2013 to 2015, central government paid out 28.44 billion yuan in NEV subsidies, while local governments paid out more than 20 billion. (It is unclear whether the SASAC number and MOF number are calculated using the same methodology.) A comprehensive list of suspected manufacturers and the subsidies they collected through illicit means was leaked.¹

Distortions created by subsidies may contribute to overcapacity. According to an April 2018 article, by June 2017, NEV capacity Chinese producers are building has surpassed 20 million vehicles, or 10 times the capacity of what the government guidelines planned for up to the year 2020. According to a researcher with Ministry of Industry and Information Technology (MIIT) affiliation, the overcapacity may be much larger than the Chinese market can absorb for the next several years.²

The inefficiencies due to the poorly designed subsidies are, according to some analysts, harmful to Chinese domestic industry. To begin with, subsidies hurt competitiveness. The market price of NEVs from Chinese producers are twice as high as those from joint venture producers. In addition, through flawed design and implementation, the subsidy regime lead to fraudulent behavior that disrupt industry norms and encourage rent-seeking. Such problems can undermine the health of an entire sector if extensive enough. According to 21^st Century Economic Herald, virtually all automobile conglomerates in China were implicated in the MOF investigation.

The Chinese government has undertaken several rounds of reform of direct subsidies for NEVs. They are now smaller and better targeted. However, there has been less scrutiny of other subsidies the government provides to NEVs, such as that for infrastructure, mandated by a 2015 circular from the National Reform and Development Commission. There is some evidence that inefficiencies and fraud may also plague charging stations for NEVs. It is worthwhile to continue to track the development of these policies.