China Steel the Worst-Affected Industry When It Comes to Subsidies

As we continue along from Part Two of this article, this FT article states that besides direct cash infusions, many local governments in China provide very cheap land, cheap credit, discounted utilities and tax breaks to state-owned and private companies that set up in their backyards.

Some of the most heavily subsidized companies in China are automakers, such as Chery, BYD and Geely, the FT says. Overcapacity in the auto industry is rampant and in the case of Geely, which bought Volvo in 2010, more than half of its net profits came directly from subsidies in 2011.

In fact, subsidy income for Geely that year was more than 15 times greater than the next biggest source of net profits – “sales of scrap metal” – according to analysis from Fathom China.

Steel, very much an industry of interest to us, is one of the worst affected…even the Chinese admit this.

“Five years ago, steel was an industry of huge profits,” Zhang Xiaogang, who heads China’s fourth-largest steelmaker Anshan Iron and Steel, is quoted by the FT as saying. “Precisely because it was so lucrative, there was a lot of repetitive construction and a huge amount of assets pouring into the field, causing the overproduction nowadays.”

Today, even though China’s steel production is running at record levels, only about 80% of the country’s production capacity is being used.

Worryingly, the article observes that in almost every industry, companies’ investment and growth plans have been predicated on the belief that the government would never allow growth to drop below 8-9%. That has changed – growth is going to be slower this year and for the foreseeable future, not just due to the global economy, but as Beijing seeks to steer the economy towards more internal consumption, the rampant growth of old cannot continue.

Local and provincial governments, however, continue to prop up their local champions, hoping restructuring will happen in someone else’s backyard. The cold reality is that much of it has been forced on the rest of the world so far.

Read Part One of this article here.

Read Part Two of this article here.

Read more from Stuart Burns.

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