Huawei a key beneficiary of China subsidies that US wants ended

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BEIJING, May 30, 2019 (BSS/AFP) – A replica of the Palace of Versailles,
medieval turrets, and spires rise across Huawei’s new campus in southern
China, a monument to the telecom giant’s growing fortune — and the benefits
of state aid.

The fairytale-like facilities rest on land that was sold by the local
government at cut-rate prices to woo and bolster a strategic, high-tech
company like Huawei.

It is the kind of government largesse that has fanned US frustrations at
China’s industrial policies — subsidies are a sticking point in protracted
trade talks between the world’s top two economies.

Huawei has become a major flashpoint in the trade war, with President
Donald Trump taking steps to block the company’s dealings with US companies,
threatening its global ambitions.

With the dispute shining a spotlight on China’s technological shortcomings,
the subsidies are a window into the kind of measures Beijing may step up as
trade negotiations founder.

Huawei’s annual reports and public records show that it has received
hundreds of millions of dollars in grants, heavily subsidised land to build
facilities and apartments for loyal employees, bonuses to top engineers, and
massive state loans to international customers to fund purchases of Huawei
products.

“Below market price land sales, massive targeted R&D grants, and export
financing on terms that are more favourable than what Huawei could get from
the private sector collectively appear to provide significant subsidies that
other countries could challenge at the WTO if they are harming domestic
companies,” said Claire Reade, a former assistant US trade representative.

Huawei founder Ren Zhengfei had denied that the company received subsidies
in a BBC interview in February, but a Huawei spokeswoman later said Ren meant
the firm did not receive any special government aid.

“Like other companies, Huawei receives research subsidies from governments
in several jurisdictions,” the spokeswoman told AFP.

Over the past 10 years, Huawei has received 11 billion yuan ($1.6 billion)
in grants, according to its annual reports.

More than half was given by China as “unconditional government grants”
because of the firm’s “contributions to the development of new high-
technology” in China, according to Huawei’s 2009 annual report.

Even some of Huawei’s top engineers receive bonuses through government
programmes: more than 100 of them received hundreds of thousands of dollars
from the city of Shenzhen last year.

– Bargain-rate lakeside land –

Heavily subsidised land is often used by local governments in China to
bring in companies.

Huawei’s European-inspired campus was zoned for research by the Dongguan
city government, and because of Huawei’s status as a top Chinese company, it
received the 127 hectares of land at about one-tenth the cost of nearby
residential land.

The city also sold bargain-rate lakeside land to the firm to build upwards
of 20,000 employee apartments around its campus in a series of engineered
auctions producing a single bidder: a Huawei subsidiary.

Huawei contributed to Dongguan’s economic development and pays taxes, said
a company spokeswoman.

At the Huawei Lakeside Garden complex, Huawei employees who stick around
for three years and meet other metrics will be able to purchase their
apartments at about one-third of the price their neighbours pay.

Outside China, the country’s state policy banks have provided financing to
boost Huawei’s sales to the developing world — at times leaving the state on
the hook when risky loans go bad.

Huawei inked a $10 billion credit line with the China Development Bank
(CDB) in 2004 to provide low-cost financing to customers buying its telecom
gear. It was tripled to $30 billion in 2009.

China’s demand for infrastructure, including communications and internet
gear, is not as high as it used to be, said CDB President Zheng Zhijie, so
“what can we do with the excess production capacity? We can only send it
abroad”.

“We may give you loans to buy Chinese equipment or materials, but there
must be a Chinese element,” Zheng told AFP of his bank’s loans to help
Chinese firms expand abroad.

Brazilian telecom firm Telemar Norte Leste obtained a $500 million CDB loan
in 2009 with a two-year grace period on principal payments at a well-below-
market interest rate to buy Huawei gear.

Since 2015 China has provided more funding each year to support its exports
than the OECD’s 36 member-nations combined, according to US Export-Import
Bank data.

In late 2015, then struggling Oi S.A., Telemar’s parent company, dispatched
an executive team to China to seal a deal with the CDB for $1.2 billion in
even cheaper loans — half to buy Huawei gear, and half to refinance debt —
with its original loan still on Oi’s books.

Six months later Oi filed for Brazil’s largest ever bankruptcy. The CDB was
owed $650 million, and under new terms will not see payments until 2023 at an
even lower set interest rate.

Nevertheless, Oi is working with Huawei to prepare for 5G.

Similarly, Indian wireless provider Reliance Communications filed for
bankruptcy this spring with the CDB and the Export-Import Bank of China among
its largest lenders, while Huawei competitor Ericsson has been left battling
for its debts in court.

“Most telecom companies are operating really well, one or two telecom
companies because of some reason or another may encounter difficulties,”
Zheng said. “This is business risk for a bank.”