Competitive Neutrality of State-owned Enterprises in China's Steel Industry: A Causal Inference on the Impacts of Subsidies

Abstract

This study investigates whether subsidies to state-owned enterprises (SOEs) in China’s steel industry are distorting competitive neutrality. The Subsidy and Countervailing Measures Agreement of the World Trade Organization defines “specific” and “harmful” subsidies as being subject to discipline because they distort the allocation of resources. During a recession in the steel industry between 2008 to 2015, China produced excessively and exported aggressively at a lower price. This study hypothesizes that subsidies given by local governments to specific SOEs with undefined conditions softened the budget constraints of these SOEs and that the market equilibrium price would have been lower had no subsidy been provided. Using data from the financial statements of listed steel and iron firms and other relevant sources, I find that firms with operating deficits received subsidies that were large enough to compensate for their deficits. This preferential treatment of these specific SOEs induced them to engage in price cutting behavior, harming competitive neutrality in the market.