Clean-tech firms abuse government subsidies

(Ecns.cn)--China is fast becoming a leader in the manufacture of solar panels, wind turbines and other green-tech products, but the earnings of many of the country's clean energy companies are artificially high because of government subsidies, reports the Southern Weekly.

As the world keeps a keen eye on the green-tech market, Chinese companies have grabbed the growth opportunity and many have even gone public. Last year's annual reports of listed firms show there were a total of 163 clean technology companies to make successful IPOs in China by the end of 2011.

However, the reports also show that many of the companies were subsidized, and that the level of government funding was surprisingly high in certain cases.

Subsidized profits

Among the 2,342 listed companies on the Shanghai and Shenzhen Stock Exchanges, there is a group of corporate celebrities comprised entirely of players in the green-tech field whose year-on-year net profit growth rates are much higher on average than other industries.

These celebrity companies are mainly engaged in ventures such as new-energy products, industrial energy-saving projects, energy-saving plans for buildings, sewage treatment, solid waste management, desulfurization and denitrification.

In 2011 about 100 of the companies, which made total net profits of up to 10 billion yuan (US$1.6 billion), received subsidies from the government, according to the Southern Weekly.

The annual reports reveal that nearly a third of those net profits came from subsidies.

This has greatly boosted the profile of the clean-tech industry on the stock market, yet without the government support, their profits would probably turn into losses.

Unfair standards

Among the 100 subsidized companies, 30 saw a year-on-year net profit growth of more than 40 percent in 2011, while others achieved comparatively low profitability or even suffered slight losses.

The disparity exists because the standards for government subsidies vary greatly for clean-tech companies. For example, subsidies are much higher for LED-related companies, as well as those in the green chemical and sewage treatment businesses.

Ninety percent of the net profits of Sanan Optoelectronics Co. Ltd, a company principally engaged in LED products and solar electricity systems, were the result of a very high government subsidy.

Beijing Origin Water Technology Company, a leading high-tech firm whose core business is membrane filtration systems for industrial sewage treatment and recycling, was also well subsidized in 2011; its year-on-year profit growth was 97.92 percent, reveals the Southern Weekly.

With such large subsidies, these lucky companies can easily achieve profit growth even if they don't perform as well as expected, says an industry watcher.

In recent years, surplus capacity and sliding prices have been challenging companies making LED chips in China, and only the large, state-backed players are likely to pull through, analysts say.

Bad for market

It is understandable for the government to support emerging industries, but if listed companies take advantage of subsidies to cover their losses, the intension of the policy will be undermined, argues the Southern Weekly.

Sanan Optoelectronics has been a particularly clever player, receiving subsidies from various levels of government. First, it lured a subsidy of 525 million yuan (US$82.6 million) from the Wuhu government in Anhui Province, followed not long after by a subsidy of 500 million yuan (US$78.7 million) from the prefecture-level city of Huainan.

Local governments welcome the involvement of such large companies to boost economic development, while the companies crave subsidies to improve their financial statements, creating a mutually beneficial situation.

But this has led to unfair market competition, since only those with official backgrounds can get sufficient subsidies, complains Guo Xiu, a member of the Guangdong Lighting Association.

And once large companies get the funding, they will try any means to force out small- and medium-sized enterprises, Guo adds.

In 2011, 35 of the 100 listed green-tech companies suffered negative profit growth, primarily because they did not receive subsidies. Without sufficient capital, they could not compete with large heavily-subsidized companies.

Last week, China's Ministry of Finance said the central government plans to spend US$27 billion this year to promote energy conservation, emission reductions and renewable energy.

The plan was made as a solution to China's position as the world's biggest emitter of carbon dioxide (CO2), followed by the United States.

Since emission cuts have become an important task for the next decade, support for clean-tech companies will likely increase. However, the government should figure out other alternatives to its subsidy policy, and come up with a comprehensive support plan to create a fair and balanced market.