## Industrial Policy in China: Quantification and Impact on Misallocation

_IMF Working Papers, August 8, 2025_

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## Bibliographic details
- Authors: Daniel Garcia-Macia, Siddharth Kothari, Yifan Tao
- Published: August 8, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229017855.001

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### 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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_Source: https://www.imf.org/en/publications/wp/issues/2025/08/07/industrial-policy-in-china-quantification-and-impact-on-misallocation-568888_