EU probe shows hidden costs of China subsidies

May 28, 2012

By Wei Gu

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Subsidies are an old Chinese practice that is causing new headaches. The European Commission is poised to launch a big trade case against China over state credit given to telecoms equipment manufacturers, according to the Financial Times. Yet the companies in question, such as Huawei and ZTE, are competitive enough not to need such perks. Beijing’s support for national champions makes it easy for others to cry foul play.

Huawei’s $30 billion credit line from China Development Bank is believed to be at the centre of the probe, according to a person familiar with the situation.  A European Commission report said in 2011 that China’s largest telecom equipment makers are benefiting from significant government at home, including “massive” credit lines from state-owned banks.

But the effectiveness of cheap state financing may be exaggerated. Huawei itself mostly uses foreign banks for financing, since they offer more competitive rates. Huawei’s customers also rarely tap into that CDB credit line for export financing, as the terms aren’t that favourable, according to a person close to the situation.

It may be sour grapes. Huawei, the world’s second-largest telcom equipment maker by revenue after Ericsson, has been grabbing market share from its Western peers. It spends a high ten percent of its revenues on research and development. Moreover, the company’s low-cost equipment gear may also be more suitable to developing markets, which are the main growth areas.

Tellingly, no European companies have formally complained, which suggests they are eyeing more business in China. The EU’s main goal may be to prize open the market to more European companies. China’s build-out of dozens of “smart cities” in its current five-year plan represents a $153 billion opportunity across 54 projects, and the bulk of them will be telecoms equipment, according to Boston-based Lux Research.

Even so, the subsidies are a nuisance. State lenders may want to show Beijng they are helping Chinese companies succeed abroad. But easy credit lines make it easier for foreign governments to punish Chinese companies and demand concessions – even if those subsidies are unnecessary and unused. Generous state support could be turning into a disadvantage for China’s export giants.

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