Updated Nov. 16, 2016 10:31 a.m. ET
President-elect Donald Trump’s talk of punitive tariffs on Chinese goods has put the trade world on edge. China’s rising portion of grants and subsidies in industrial profits—its own form of protectionism—may only add to the tension.
Large government subsidies, which are no secret, are becoming a larger part of operating profits at China’s companies, both state-owned and private. Almost 14% of listed, nonfinancial companies’ profits are attributable to government support, according to an analysis by Wind Info. That’s up from just under 5% six years ago. Even among private firms, many of which have state shareholders, 11% of profits come from the state.
While Mr. Trump has concentrated on China’s currency, subsidies are another way that governments can push down the price of their goods on the export market. If large enough, they could even ameliorate the effects of possible tariffs.
The helps comes in several forms, including all-cash grants, tax rebates, local government help and exporter-supportive policies. Driving the need for the hand outs: In China, when a company posts losses for four straight years, it gets delisted from the stock exchange. Almost 10% of listed provincial state-owned companies rely on government largess to be profitable.
Thriving sectors benefit as well. In China’s car industry, the world’s largest, subsidies have grown 50% annually since 2010. For leading car maker Geely, government subsidies and grants have accounted for 19% of gross profits, on average, over the past five years. Of the firms reliant on subsidies to keep them profitable, the top three are in the auto sector.
Without this backing, building out key technology such as producing electric vehicle batteries wouldn’t be feasible in the short-term, according to a paper by researcher Hao Han at Tsinghua University and his co-authors. Subsidies account for more than 50% of the cost of batteries. Meanwhile, industries such as machinery have seen profits surge, albeit from a low base in recent months. Subsidies there account for 30% of profits.
Government incentives are hardly confined to China. The U.S. has its own web of tax incentives and other inducements. Global multinationals rank among the largest recipients too. Many boosts come through programs that incentivize consumers. China’s help tends to be more on the supply-side.
In China, all that help skews valuations, giving the subsidized ones a bump, according to a 2014 paper by U.K. academics Edward Lee, Martin Walker and Cheng Zeng.
Hypothetically, only companies with promising projects are supposed to benefit. The reality is subsidies help the weak too. China Shanshui Cement and China Yurun Food have been large recipients of grants. Units of both companies defaulted on debt this year.
China has talked about reforming the hand of the state and “marketizing” subsidies so they are less about doling out cash and more about responding to market incentives. But there is little talk of reducing them. Should Mr. Trump follow through on promises to turn the U.S. inward, Beijing will likely continue to help its companies the same way it always has—and perhaps even more.
Write to Anjani Trivedi at firstname.lastname@example.org
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