Almost all of Chinese listed companies receive government subsidies

Wednesday, 10th September 2014, 19:30 HKT
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This year sees some impressive first half profits from Chinese listed companies. Top companies such as PetroChina, Air China and China Construction Bank helped push these 2,537 Chinese A-share companies total net profits to a total of 1.266 trillion yuan, a year on year increase of 10.1%.

However, upon closer inspection, it seems these figures are not quite as impressive as first seem. Nearly all of the listed companies received government subsidies, a total amount 34% higher than last year, and most went to the loss making SOEs, which suffer from oversupply and high inefficiency.

China Economic Weekly, looking at company half-yearly reports sourced from Wind Info (a Chinese market data provider), discovered that 88.1% of Chinese listed companies (total of 2,235) received government subsidies totaling 32.26 billion yuan (over 5 billion dollars). In some cases the value of the government subsidies far exceeds the companies own net profits. This situation is present in all industries, including manufacturing, finance, real estate, and covers SOEs and privately owned companies.

No doubts it’s beneficial for the government to use taxpayers money to support new industries, which helps rebalance the Chinese economy, or to increase efficiency in the main industries. But unfortunately the data from Wind Info shows that a lot of government subsidies are flowing instead into industries which currently are experiencing oversupply conditions. Local governments are not checking if these funds are being used according to government policy, and don’t release details of how the subsidies are used, to the public.

These government subsidies, whether monetary or non-monetary assets, are not direct government investments, hence are known in the market as the government’s ‘tonic’. For some firms, these government subsidies can mean the difference between an overall profit or loss. For subjective purposes, not all subsidy amounts are included in the calculations. For example according to their half-yearly report, PetroChina has received 5.174 billion yuan in government subsidies, but has only booked 1.421 billion yuan on the accounts for the first half of 2014. This was still enough to ensure PetroChina was the biggest user of government subsidies in the first half of this year.

This year a total of 2,235 listed companies received government subsidies, an increase of 58 companies compared with last year. This amount includes 1,182 private enterprises, 557 local SOEs and 289 central SOEs. Of this total amount, 58 companies received subsidies in excess of 100 million yuan, compared with 36 companies last year, which is 48% of the total value of government subsidies booked for the first half of the year. And of these 58 companies, 40 or 68.9%, were SOEs.

Finally what’s important to note, is the impact these subsidies have on some the firms overall profitability. For example Air China, which was the second biggest user of government subsidies. In 2014 H1, Air China’s net profit was 474 million yuan, but without including the value of government subsidies of 818 million yuan, Air China actually made a loss of 344 million yuan.

(Article not to be copied or reproduced without permission or citation).

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