Understanding the overuse of chemical fertilizer is critical for global food security and environmental protection. We use a nationally representative rural household survey from China, the difference-in-difference, three-step approach, and Seemingly Unrelated Regression methods to assess the impacts of China’s new agricultural subsidy on chemical fertilizer use, heterogeneity effect, and mechanism. The results show that, first, the new agriculture subsidy reduces the use of chemical fertilizer by about 7.2 percent. A series of robustness tests confirms the finding. Second, the heterogeneity analysis shows that the subsidy’s negative impact on fertilizer use is substantially greater among younger farmers than among older farmers. The negative effect also is significantly more in the main grain-producing areas than in non-grain-producing areas of China. Third, the mediating effect analysis shows that farmland scale mediates 8.3 percent of fertilizer use, and adoption of agricultural machinery mediates 48.6 percent of fertilizer use. Thus, China’s new agricultural subsidy reduces fertilizer use by helping farmers expand their farmland scale and adopt farm machinery. Our findings underscore the positive role that reforming the agrarian subsidy policy plays in sustainable development.