Fiscal Subsidy Policy on Home Appliances: Its Effects on Domestic Consumption and Exports in China

• Author: Hang Wu,Ting Ji,Faqin Lin,Ningyuan Jia
• DOI: http://doi.org/10.1111/cwe.12286
• Published date: 01 July 2019
• Date: 01 July 2019

China & World Economy / 53–73, Vol. 27, No. 4, 2019

53

©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Fiscal Subsidy Policy on Home Appliances:

Its Effects on Domestic Consumption and

Exports in China

Ting Ji, Ningyuan Jia, Faqin Lin, Hang Wu*

Abstract

This paper evaluates the effects of the Home Appliances Going to the Countryside

(HAGC) policy, a fiscal subsidy program implemented in China to boost private

consumption of home appliances in rural areas from 2007 to 2012. Using the policy as a

natural experiment and employing the difference-in-difference estimator, we nd that the

policy did not increase domestic sales of relevant goods as expected; instead, it actually

reduced domestic sales and signicantly promoted exports. These surprising results are

robust across regressions of alternative datasets, more controls, and different regions.

We further provide detailed information of undisclosed audit data for a county in

Zhejiang province to shed light on the underlying mechanism of such unexpected results,

suggesting loopholes in the HAGC and changes in export tax rebate rates.

Key words: difference-in-difference estimator, scal multiplier, home appliances to the

countryside

JEL codes: E62, E65, F12, H32

I. Introduction

Since the reform and opening up policies were initiated, China has experienced rapid

economic development, with GDP rising from RMB365.4bn in 1978 to RMB67.67tn in

2015, and international trade growing from US$20.6bn to US$2.90tn during the same

period. International trade has become an indispensable component of China’s economic

*Ting Ji, Assistant Professor, School of International Trade and Economics, Central University of Finance

and Economics, China. Email: jiting@cufe.edu.cn; Ningyuan Jia, PhD Candidate, Department of Economics,

London School of Economics and Political Sciences, UK. Email: n.jia@lse.ac.uk; Faqin Lin, Associate Professor,

School of International Trade and Economics, Central University of Finance and Economics, China. Email:

linfaqin@12 6.com; Hang Wu, Associate Professor, School of Management, Harbin Institute of Technology,

China. Email: hang.wu@hit.edu.cn. Ting Ji acknowledges the nancial support of the National Natural Science

Foundation of China (Nos.71703180 and 71603297). Faqin Lin acknowledges the nancial support of the National

Natural Science Foundation of China (No. 71773148).

Ting Ji et al. / 53–73, Vol. 27, No. 4, 2019

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©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

development; therefore it is not surprising that the Chinese economy struggled during

the 2008 global nancial crisis, which dramatically discouraged foreign demand. The

crisis fully revealed the vulnerability of China’s external demand-driven economy, and

many believe that China should transform the original export-oriented development

model into a domestic demand-led development model. For example, at the 2009

annual meeting of the Boao Forum for Asia, former Premier Wen Jiabao made a public

statement suggesting the acceleration of economic transformation by combining

domestic demand and the positive use of external demand to turn the economy into a

more balanced development model.

Facing serious economic contraction pressure and attempting to change the

economic development model, the Chinese government proposed the comprehensive

“home appliances going to the countryside” (HAGC) plan to expand domestic demand

and thus adjust the relative importance of domestic sales and exports. The HAGC

was a scal subsidy program intended to boost home appliance consumption in rural

areas. Under this project, farmers were entitled to a subsidy of 13 percent of the cost

when purchasing specified appliances. The objectives of the policy were threefold:

First, the intention was to boost domestic private consumption, which could adjust the

relative importance of consumption, investment and international trade within GDP for

the Chinese economy. Second, home appliances are a major category among China’s

exports but faced a sharp decline in external demand during the global nancial crisis.

The HAGC could potentially have absorbed the excess supply and helped manufacturers

to survive the economic downturn. Third, the policy targeted farmers, typically a lower

income group in China, in order to improve economic equality.

Domestic sales and exports are naturally substitutable if the supply is inelastic, that

is, increasing domestic sales are associated with decreasing exports, and vice versa.

This is particularly true in the short run as adjustment of production capacity is unlikely

to be immediate. Therefore, following the implementation of the HAGC, intended

to encourage domestic sales, we expect a decrease in exports. However, if the policy

lasted for a period longer than “the short run” and producers could adjust their supply,

the story would be totally different. For example, if the “home market effect” is strong,

the relationship between domestic sales and exports could be complementary. More

specically, if production saw an increasing return to scale, as posited by Krugman (1980,

1991), the expansion of domestic demand would reduce production costs and could

eventually promote exports. In this case, domestic sales and exports would move in the

same direction.

In this paper, we treat the HAGC policy as a natural experiment. Using sectoral

export data from 2003 to 2012, as well as domestic sales data, we systematically study