Tianjin Pipe Corp.’s 850-acre campus is unlike any other steel factory in the world. Ostriches, spotted deer and peacocks roam the grounds amid willow trees, bamboo bridges and Chinese pavilions. The plant has its own light-rail stop and hotel.
Another feature -- the presence inside the fence of large branch offices of China’s three biggest state-owned banks -- symbolizes the government financial support that puts Tianjin Pipe at the center of a growing trade dispute, Bloomberg Markets magazine reports in its January issue.
The U.S. International Trade Commission in October upheld tariffs of 63 percent and higher on steel products from Tianjin and other producers, finding that U.S. steelmakers are harmed by subsidies the Chinese companies receive and by unfair pricing.
"While we say, ‘Let the markets work,’ China is building up these national champions,” says Alan Price, a Washington lawyer who has represented U.S.-based steelmakers in trade cases.
This battle over the government’s backing for its exporters marks a further deterioration in Chinese-American relations, already strained by charges and countercharges of currency manipulation.
A review of bond prospectuses shows how Tianjin Pipe benefits from close government ties. The company was insolvent a decade ago. Its ownership fell entirely to four asset-management companies set up by the central government to dispose of bad debts owed to Industrial and Commercial Bank of China, China Construction Bank Corp., Bank of China and Agricultural Bank of China, all of which are state-controlled.
Cheap Funding
The revival of Tianjin Pipe, based in the port city of Tianjin in northeastern China, began after it was bought by the local government in 2003. Since then, the company has thrived with cheap funding from the banks, tapping capital at a rate closer to that of a government entity than a commercial borrower.
"The very existence of this company is due to massive subsidies through state banks which will bail out state firms favored by local and central governments endlessly,” says Victor Shih, a professor at Northwestern University in Evanston, Illinois, who studies the Chinese financial system.
When Tianjin Pipe issued 3.48 percent one-year bonds in July, China’s one-year benchmark bank lending rate was almost 2 percentage points higher, at 5.31 percent. The company’s funding costs were closer to that of China’s Ministry of Railways, which issued one-year bonds in July at 0.89 percentage points below the rate on the Tianjin Pipe debt.
Tianjin’s Debt
Tianjin Pipe’s debt surged as China’s government directed its state-owned banks to increase lending starting in late 2008 to combat the effects of the global economic slowdown. At the end of March the company’s long-term debt stood 6.72 billion yuan ($1 billion), up from 1.89 billion yuan at the end of 2008, according to the company’s financial statements.
The profits of China’s government controlled companies would be entirely wiped out if they paid market rates of interest, according to a 2009 study by the research institute of Hong Kong’s central bank.
Liu Yunsheng, the chairman of and Communist Party secretary for Tianjin Pipe, who was appointed by the Tianjin government, wasn’t available for an interview. The company declined to answer faxed questions.
State-owned companies such as Tianjin Pipe fend for themselves and are not aided by the state, Vice Commerce Minister Chen Jian told reporters on Nov. 1. "The government does not give any subsidies,” Chen said. “Maybe some people have seen how Chinese enterprises are booming and they are feeling confused.”
Tariffs and Retaliations
Michael Pettis, a finance professor at Peking University and a former managing director at Bear Stearns Cos., says the funding received by state-run companies such as Tianjin Pipe allows them to undercut foreign rivals.
Trade complaints against China have surged since Barack Obama became president -- as have retaliatory steps by China. The U.S. has slapped duties on Chinese-made tires, glossy paper and aluminum products. China has put tariffs on poultry and specialized steel.
State support for key companies is a policy that China won’t easily abandon, says Price. “It’s a pattern we see to varying degrees throughout Chinese industry,” he says.
In the case of Tianjin Pipe, whose exports to the U.S. have plunged since the tariffs were imposed, China may have a workaround. The company is set to begin construction next year on a $1 billion steel pipe plant in south Texas, near Corpus Christi, that is designed to produce 500,000 metric tons of pipe from recycled steel scrap each year.
Texas Jobs
The plant will create 300 jobs in the first year it operates and lead to a total of 600 jobs, says Josephine Miller, executive director of the San Patricio County Economic Development Corp. The company says the factory will have an annual payroll of $18 million. In Texas, Tianjin Pipe is getting a boost from government support of a different kind: State tax breaks to offset the cost of pollution-control equipment and property tax reductions.
The Tianjin investment “sounds strange, strange, strange, but they have been selling pipe in the Houston area for 20 years,” Miller says in an interview. “If someone said they were investing a billion dollars in your area, you would perk up.”
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