There are also regular cash handouts that lubricate companies’ daily operations, and money for new industrial parks. Injecting capital outright, as well as fast-tracking public-markets financing, are also on the table.
Semiconductor Manufacturing International Corp, China’s largest chip foundry and its best shot at catching up to Taiwan Semiconductor Manufacturing Co, checks all of the boxes. Its Hong Kong-listed shares have risen more than 200 per cent, amassing a market cap of $US29 billion.
Without the Beijing put, though, the income statements of many tech firms would look drastically different. At SMIC, government funding, which appears in “other operating income”, rose 87 per cent to $US293 million in 2019. A further $US59 million in the first quarter exceeded the foundry’s $US51 million bottom-line profit; in other words, without subsidies, SMIC would be in the red – and it wouldn’t even have a price-to-earnings ratio to look at.
This phenomenon is pervasive. Of the 37 listed companies classified as “integrated circuit” industries, subsidies accounted for a whopping 15 per cent of operating profit last year, on a market-cap weighted basis, Bloomberg Opinion analysis shows.
The stand-outs are memory-chip maker Gigadevice Semiconductor (Beijing) and Unigroup Guoxin Microelectronics, which designs chips used in smart cards. A similar picture emerges for software companies, such as Yonyou Network Technology, which aims to become China’s Salesforce.com, and Sangfor. All these stocks are big winners this year.
While it’s great Beijing is tending its tech gardens right now, the question is whether and when it will pull the plug.
Over the years, China’s electric vehicle sector has had an on-again, off-again relationship with subsidies, creating turbulence in stocks, as my colleague Anjani Trivedi has written. Will the government get tired of paying for an expensive tech build-out, too?
Another aspect worth considering is that, unlike previous endeavours, this new infrastructure spree will rely more on local governments than national spending.
Indeed, major areas including Beijing, Shanghai and Jiangsu province have been rolling out ambitious investment blueprints lately. But, pinched by the virus outbreak, they have no money. Their funding gap will reach as much as 11.5 trillion yuan ($US1.64 trillion) this year, according to the Ministry of Finance.
The southwestern city of Chongqing, for instance, saw its fiscal revenue tumble by 16.8 per cent in the first four months this year. Still, it vowed to become a strategic investor in Tsinghua Unigroup Co, which has the very expensive goal of becoming China’s Samsung Electronics Co. Will Chongqing be able to deliver?
Of course, extraordinary times call for extraordinary ways to look at stocks. Right now, investors have big grins on their faces when they do a word search for mentions of “government” in company filings.
China’s tech carnival can’t go on forever, though. At some point, wary of the trillion-dollar bills, Beijing will want to slow down the money flow. By then, investors will be left holding stocks with lofty ambitions and peanut-sized earnings.