Many Chinese steel enterprises reported profits in their semi-year reports despite the slump in the industry, due to the large government subsidies, the Xinhua News Agency reported Wednesday.

Some of the subsidies are for research projects initiated by the government in a bid to encourage innovation, Wang Guoqing,

a senior analyst with Beijing Lange Steel Information Research Center, told the Global Times Wednesday, and some are in the form of support from local governments because the steel enterprises often have a big scale and are important for the local economy.

Last year, about 30 listed steel enterprises shared around 4.5 billion yuan ($735.27 million) in subsidies from the governments, said Liu Haimin, deputy director of the China Steel Development and Research Institute.

The State-owned Assets Supervision and Administration Commission of the State Council (SASAC) usually holds large stakes in the listed steel makers, Jia Liangqun, vice chairman of mysteel.com, told the Global Times Wednesday.

If the enterprises suffer serious losses or even go bankrupt, the local governments and branches of the SASAC will have no choice but to deal with the resulting problems such as mass unemployment or poor local financial records, Jia said.

Liaoning-based Lingyuan Iron and Steel Co recorded 36.93 million yuan in net profit in the first half of this year, according to its semi-annual report released on August 12, compared with a 230 million yuan loss in the first half of 2012. The company received 380 million yuan in subsidy in the first half of the year, the Xinhua report said.

Large subsidies will help enterprises improve their competitiveness if they can reduce the vast scope of their business and concentrate on flagship products and innovation, Wang said, but they also create unfairness in the market.

"The subsidies distort the market rule to some extent," Wang said.

"We should respect the market laws and also take specific conditions into consideration at the same time," Jia said.

The central government should stop supporting the steel industry through large infrastructure construction programs, Jia noted.

Jia believes China should put more efforts in developing the service industry which will absorb surplus labor resulting from the closure of steel firms.

The huge subsidies are also not conducive to the government efforts to solve the overcapacity problem, Jia said.

The Ministry of Industry and Information Technology said in July it will eliminate 6.98 million tons of steel production capacity in 2013.