Industrial Policy in China: Quantification and Impact on Misallocation
IMF Working Papers, August 8, 2025
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- Authors: Daniel Garcia-Macia, Siddharth Kothari, Yifan Tao
- Published: August 8, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229017855.001
Quantification of Industrial Policy Instruments
- The paper quantifies the size of the main industrial policy instruments in China using data from financial reports of listed firms and the land registry.
- The equivalent fiscal cost of industrial policy through cash subsidies, tax benefits, subsidized credit, and subsidized land for favored sectors (including both private and state-owned firms) is estimated at about 4 percent of GDP per year.
- The share of tax benefits in the total fiscal equivalent is described as growing over time.
Impact on Factor Allocation and Aggregate Productivity
- A structural model is used to estimate the relationship between industrial policies and factor misallocation for a broad sample of firms.
- Various industrial policy instruments affect factor allocations in different ways:
- Subsidies tend to lead to excess production.
- Trade and regulatory barriers limit production.
- Overall effect on productivity:
- Factor misallocation from industrial policies is estimated to reduce domestic aggregate TFP by about 1.2 percent.
Key Findings and Statistics
- Equivalent fiscal cost of industrial policy: about 4 percent of GDP per year.
- Estimated reduction in domestic aggregate TFP from misallocation: about 1.2 percent.
- Data sources: financial reports of listed firms and the land registry.
Policy Implications and Recommendations
- The results resonate with IMF policy recommendations for China to:
- Scale back industrial policy.
- Increase transparency of industrial policy measures.
Source: IMF Working Paper "Industrial Policy in China: Quantification and Impact on Misallocation" by Daniel Garcia-Macia, Siddharth Kothari, and Yifan Tao, IMF Working Papers 2025, 155 (2025).
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