End Of Subsidies To Impact China Firms Profit Margins

Chinese carmaker BYD Co. (1211) may be getting some bad news as it prepares to start selling in the U.S. next year. A planned reduction in government subsidies and a phase-out of interest-rate controls threaten to raise costs for it and thousands of companies across China.

Less than a decade after surging wages began forcing manufacturers to cheaper countries, President Xi Jinping is preparing to dismantle a web of subsidies that began under Deng Xiaoping in the 1980s. The measures could slow average annual growth to as low as 3 percent through 2022 from 10 percent in 2010. They also will mean higher prices for capital, land and water and swings in the cost of energy, potentially squeezing indebted state businesses.

Among those with “highly leveraged” financial profiles are power producer Huaneng Power International Inc. (902) and China Shipping Development (1138) Co., according to a Sept. 2013 report by ratings company Standard & Poor’s.

Societe Generale SA says as many as half of China’s steelmakers may have to shut down. Farther away, Australian iron producers such as Fortescue Metals Group Ltd. (FMG), which derives almost 100 percent of its revenue from China, could see lower profits.

Bloomberg

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