And it’s those subsidies and other Chinese government support for domestic firms that are at the heart of the trade war with the United States. Critics say the funding and incentives give those companies an unfair advantage in the race to dominate the technology of the future, particularly in the case of the heavily-favoured giants of the Chinese economy: state-owned enterprises.

“Subsidies have risen to the top of the policy agenda because they are central to industrial policy, which is the new fault line in Sino-Western relations – perhaps bigger than trade itself,” said George Magnus, associate at Oxford University’s China Centre and research associate at SOAS, London.

“It is not only subsidies to state-owned enterprises [SOEs] or other preferred companies,” Magnus said. “It is also the principle of the state extending privileges and advantages to local companies, including SOEs, in vital sectors, especially tech, with implications for security and military matters.”

With China and the United States in talks during their 90-day tariffs truce, the American Chamber of Commerce in China and the US Chamber of Commerce recently issued a joint report calling on Washington to address structural challenges in China’s economic practices, which the groups say are unfair and restrictive for US companies.

“Any solution must address systemic challenges at all levels of the Chinese government.”

In 2015, when Beijing unveiled MIC2025, it announced US$350 billion in subsidies to 10 industries – such as robotics, chips and new energy vehicles (NEVs) – that were being prioritised in its pursuit of self-sufficiency and global prowess in core technologies.

The US and European Union have criticised the programme, saying it is unfair and will lead to market distortions. China has suggested it could adjust the initiative, but the West remains unconvinced.

In the NEV sector alone, half of the US$16 billion in subsidies offered to electric carmakers globally in the past decade have been provided by China. It has been showering manufacturers with subsidies to encourage alternatives to pollution-producing petrol vehicles.

Subsidies have provided a lifeline for companies like Suda. Since it started in 2010, the company has received at least 20 million yuan (US$3 million) from Henan’s provincial government in research and development funding.

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The city government of Sanmenxia, in Henan, borrowed 100 million yuan to re-lend to the company, according to local media reports. It set aside more than 230 hectares (568 acres) of land for Suda to set up production, testing and logistics facilities.

It also ordered utility companies to upgrade the electricity grid and install charging stations for a then non-existent fleet of battery-powered cars.

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In 2011, the city government had ramped up its ambitions and published an ambitious electric car plan, with an annual production target of 100,000 vehicles by 2015. Even when progress was slow in producing test cars in the years that followed, local governments kept faith in the industry because the gold, bauxite and coal mines that their economy depended on had a limited lifespan and there were no other strong candidates to replace them.

“Without various kinds of government support, it was impossible for us to make it,” said Song after receiving the green light in early January from the Ministry of Industry and Information Technology (MIIT) to begin mass production, making it the 11th company to gain a production licence.

The NEV industry remains reliant – not only in China but in the US and Europe – on government support, in the form of state procurement, production and consumer subsidies, tax deductions, regulation, financing of charging infrastructure and so on, according to Dan Prud’homme, associate professor at Pôle Universitaire Léonard De Vinci in Paris.

“China’s state approach to supporting its NEVs industry has been controversial,” Prud’homme said.

The MIIT stipulated in 2009 that foreign firms seeking manufacturing licences and subsidies for NEVs had to first master one of three core NEV technologies in a joint venture with a local Chinese partner.

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From 2017, even more controversially, those foreign firms were required to master all – not just one – of the three core technologies.

“Firms that didn’t meet these requirements couldn’t produce NEVs in China, instead having to import NEVs – which was a costly exercise – and didn’t benefit from the state financial support needed to make NEVs more competitively produced and priced compared with traditional autos,” Prud’homme said.

“The same requirements do not exist in major markets such as the US or Europe.”

Last year, the requirement that foreign firms enter a joint venture in China to be allowed to make NEVs there was removed, reducing the impact of the 2017 MIIT regulation.

Still, Suda’s Song said the government support his company received paled in comparison with the subsidies given to SOEs.

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“The whole system is designed for state-owned enterprises,” he said. “Our existence is only allowed for the sake of stimulating the vitality of SOEs.

“Luckily we succeeded, and recently MIIT officials asked us to do better and use the indigenous innovation to conquer the world market.”

China’s NEV sector is largely dominated by government-backed companies – a dominance mirrored in other MIC2025 sectors, such as chips, telecoms, shipbuilding and high-end machinery.

With the US and the EU continuing to question its state-subsidised industrial strategy, Beijing is expected to agree to discuss the subsidy issue within the framework of the World Trade Organisation (WTO), according to He Weiwen, a former economic and commercial diplomat at the Chinese embassies in New York and San Francisco.

“China will honour the rules of the WTO on subsidy and probably agree to improve disclosure in a case-by-case manner,” said He, now a senior fellow at the Centre for China and Globalisation, a think tank in Beijing.

WTO rules prohibit subsidies to specific companies because of the competitive advantage they confer, but countries cannot use remedies such as duties to offset such subsidies without hard evidence of them.

Akihiko Tamura, professor with the National Graduate School for Policy Studies in Japan, said greater transparency was key to addressing subsidies and a proposal submitted to the WTO by seven members was an important step in this direction.

That proposal – sponsored by the US, Argentina, Australia, Costa Rica, the European Union, Chinese Taipei and Japan – was discussed by the WTO Goods Council in November. It was a revised proposal on improving members’ transparency and strengthening notification requirements.

But He Weiwen said hard evidence would be difficult to find because subsidies were not detailed in China’s publicly available documents.

“As for more detailed disclosure of government-backed companies – in terms of their shareholding structure, senior executives and subsidy information – it will not work, because leeway can always be easily found,” he said.

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Phil Levy, senior fellow on the global economy at the Chicago Council on Global Affairs, said subsidies were a difficult issue, since most countries were wedded to their own subsidies and repulsed by those of others.

“This makes life particularly difficult at a consensus-based organisation such as the WTO,” he said. “Nonetheless, it would be ideal to reach new rules under the WTO – which requires a new agreement.

“For practical reasons, that would probably include more than just subsidies. The WTO has been trying unsuccessfully to reach a major new agreement for more than two decades. Perhaps the current trade tensions will provide the necessary urgency.”

China might consider a package that contained new subsidy rules if it was “even-handed” and offer assurances on other trade matters that addressed China’s concerns, Levy said.

“This is unlikely to be acceptable if it’s simply a one-sided demand for China to stop supporting SOEs and stop pursuing industrial policies.”

Many experts are pessimistic about how much China will agree to change, with President Xi Jinping having emphasised the pursuit of a “bigger and stronger” SOE sector. Although Beijing has touted the idea of “competitive neutrality”, saying SOEs and other companies would be able to compete on equal terms, observers remain sceptical.

Derek Scissors, a resident scholar of the Washington-based American Enterprise Institute, said competitive neutrality was largely a “fake idea”. “If a country, any country, really wanted an SOE to act like a private company, why would they set up an SOE in the first place?” he said.

“In China’s case, competitive neutrality is entirely fake. Perhaps the most important part of competition is that private firms can go out of business at any time. Will SOEs?”

Revenues and profits at China’s SOEs hit historic highs last year, even as the country’s private firms fought for survival during the slowest economic growth in a decade, according to the State-owned Assets Supervision and Administration Commission, which manages various SOEs.

Last year, companies owned by the central government booked revenues of 29.1 trillion yuan, up 10.1 per cent from 2017, while net profits reached 1.2 trillion yuan, a rise of 15.7 per cent from the previous year, according to the figures.

State-owned firms were able to achieve this because of relatively stable growth in the domestic economy and supporting measures by the government, according to Sasac spokesman Peng Huagang.

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A research note by Hong Kong consultancy Gavekal Dragonomics last August found the total interest-bearing liabilities of SOEs to be about 52 trillion yuan. When it came to bank loans, it was likely that SOE privileges had more to do with superior access than radically lower borrowing costs, analyst Thomas Gatley wrote in the report.

SOEs enjoy not only explicit subsidies but also hidden benefits such as implicit government guarantees for debts and lower interest for bank loans.

Pang Zhongying, a Beijing-based international affairs expert, said: “Subsidies and SOEs are issues concerning the political system and regime. It is regarded as a cornerstone for the rule of the Communist Party, which Beijing would never risk undermining, and cannot be solved by negotiations.”

Patrick Mendis, an associate in research at the Fairbank Centre for Chinese Studies at Harvard University, said the WTO’s “market economy” status may be used as a bargaining chip. China has argued it should be granted the status but the US has formally told the WTO it opposes that because of what it sees as unfair trade practices that include its state subsidies.

“The revival of the WTO applying pressure through ‘market economy’ status may modify the behaviour of China,” Mendis said. “However, Xi is unwilling to change the primacy of SOEs, because these are the economic agents that put the Communist Party in power.

“Pressure from WTO members may lead to economic reform in state capitalism, which I think is a better option for China’s domestic competition and the development of the private sector for greater innovation of its own.”