SUBSIDIES accounted for four-fifths of the profits reported by Chinese steel companies in the first half of this year, a dramatic increase in reliance on State support that illustrates starkly the industrial weakness that is an increasing drag on the economy.

    The headwinds faced by China’s massive steel sector — falling profit margins and growing dependence on handouts — are shared by other key industrial and infrastructure-related sectors, including aluminum, cement and coal.

    A Reuters analysis of first-half financial statements from 77 listed Chinese steel, aluminum and cement companies revealed a sharp deterioration in profitability.

    For the first half of 2013, subsidies accounted for 22 percent of total profits posted by China’s listed steel mills, and reached 47 percent in the full year. In the first six months of 2014, the figure jumped to 80 percent, and, even then, the sector’s profit margin halved to just 0.3 percent.

    The performance of the steel sector, which has been a major driver of China’s growth, underlines the massive challenge facing President Xi Jinping as the government tries to wean the economy off its dependence on external demand and investment spending.

    Data out at the start of last week showed China factory output grew at the weakest pace in nearly six years in August, raising fears that the economy may be at risk of a sharp slowdown unless the government implements fresh stimulus measures.

    The company statements also show rising accounts receivable — the accounting term for money owed by customers — in a sign that more Chinese manufacturers are falling behind on their payments as growth falters, posing an additional problem for firms with high credit costs and financing difficulties.

    Chinese leaders have repeatedly said they would use a period of anticipated slower growth to implement structural reform. Growth was at its weakest in 18 months in the first quarter, but the level of support still being poured into companies suggests the re-tooling of the economy has a long way to go.

    A total of 2,235 firms, or 88 percent of Chinese listed companies, received government subsidies totaling 32.2 billion yuan (US$5.24 billion) in the first half of 2014, according to data from information provider ChinaScope.

    Most of the subsidies —largely from local governments — were channeled to the steel, cement and property sector in the form of cash, tax rebates or support for loan repayments. The reasons given ranged from research and development to support for government environmental priorities.

    “There isn’t a lot of innovation happening in sectors such as steel or aluminum,” said Professor Wen Laicheng at Central University of Finance and Economics in Beijing. “The subsidies are clearly a lifeline to help the companies get through these tough times.”

    Three decades of double-digit growth rates encouraged companies to invest and build factories at a breakneck pace — resulting in high levels of debt, chronically weak profits and worsening pollution.

    Premier Li Keqiang has tried to rally local governments’ support to tackle persistent overcapacity, but the continuing subsidies show how the Central Government is fighting a losing battle.

    (SD-Agencies)