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Chinese companies, both private and state-owned, continue to benefit from generous government subsidies and grants: In the case of electric vehicle maker BYD, state support in 2018 was nearly equal to the company's bottom line.   © Reuters
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For some Chinese companies, generous state subsidies make up for losses

Electric vehicle makers weather tough year thanks to government largesse

HONG KONG/TOKYO -- For the Chinese auto industry, 2018 was a triple whammy.

Wang Chuanfu, founder of electric car and battery maker BYD, neatly summed up the industry's problems in the company's latest annual report: "international trade friction, slowing macroeconomic growth and reduction in tax incentives for new energy vehicle buyers."

For the electric car producer, whose most prominent investor is Warren Buffett, the gradual cutback in subsidies for "new energy" vehicles was largely responsible for the 31.6% fall in net profit to 2.7 billion yuan ($414 million) last year. "The change in subsidy policy for the new energy vehicle industry has, to a certain extent, affected the profitability of the industry," Wang said.

What Wang did not mention in his two-page statement was the generous subsidies and grants that the company received directly from various levels of government. In 2018, BYD recognized 2.3 billion yuan of grants in its income statement, almost on par with its bottom line.

The Xi'an Hi-tech Industries Development Zone chipped in 600 million yuan for marketing incentives. Shanxi Transition and Comprehensive Reform Demonstration District contributed 267 million yuan for basic research on car battery technology. The city of Shenzhen granted 115 million yuan to subsidize electricity bills. And there were others.

China's generous subsidies -- particularly to strategically important sectors like technology, electric vehicles and energy -- are a tense point in ongoing trade negotiations with the U.S. These grants, ranging in form from direct cash handouts to tax breaks to interest-rate subsidies, are linked to Beijing's strategic industrial policy.

Such government largesse is not only for BYD. SAIC Motor, joint venture partner of Volkswagen and General Motors, received 3.5 billion yuan from the government, up 35% from the year before. Not much detail is provided by the state-owned carmaker, but it seems clear that its pretax profit would have dropped if no grants were paid.

The effect of government help was more obvious for Chongqing Changan Automobile, where net profit fell 90% to 680 million yuan in 2018. It received 2.8 billion yuan -- 78% higher than the year before -- mainly for research and new product development.

Money given by government entities to these automakers and a few others have exceeded their respective impairment losses in 2018, due to write-offs in inventory, receivables, equipment, intangible assets and more. What their income statements show is government making up for holes created by aggressive investments in the past.

"There's always an overcapacity problem in [China's] auto industry," says Stephen Chan, Hong Kong-based credit analyst at S&P Global Ratings. "Once the industry is in a downturn trend, manufacturers will have to deal with overcapacity immediately."

Government subsidies are widespread across China's various sectors, in both state-owned and private companies.

The top three state-owned carriers, including Air China, received a total of 12.9 billion yuan last year. When global competitors suffered from surging oil prices and some even posted losses, grants paid to China Eastern Airlines and China Southern Airlines far exceeded their respective net profits.

The tech sector is no exception. BOE Technology Group, competing in flexible OLEDs with Samsung Electronics and LG Display, received over 2 billion yuan in subsidies, outstripping its 1.2 billion yuan impairment losses on inventory depreciation.

Even ZTE, which was penalized for deceiving American authorities over illegal dealings with Iran and North Korea, benefited from government grants of around 2 billion yuan. This covers over 30% of the $1 billion penalty paid to the U.S. Commerce Department.

Interestingly, not all grants and subsidies arrive as pledged -- at least, not on time. CLP Holdings revealed that 972 million Hong Kong dollars ($124 million) worth of "Renewable National Subsidy" from the Chinese central government had not been paid as of the end of last year.

Shouldn't this be counted as an impairment? The Hong Kong-based multinational power utility provider recognizes these unreceived subsidies as receivables, but does "not consider [them as] impaired," because there is "no history of default."

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