Joined: 17 Jul 2006
|Posted: Sat Jul 29, 2006 5:56 am Post subject: Dividends of Chinese Companies
|Dividends in China
Can't pay, won't pay
Jul 27th 2006 | HONG KONG
From The Economist print edition
Paying dividends would help both China's state firms and the economy
IMPRUDENT banks, aggrandising officials, avid foreign investors; many culprits are blamed for China's overheating economy. Yet those most responsible are rarely fingered: Chinese companies. The country's firms' investment in fixed assets was up by a cracking 35%, year-on-year, in June. This pace does much to explain the country's rapid GDP growth, of 11.3% in the year to the second quarter.
This investment is largely financed by companies' retained earnings: indeed, firms, not China's thrifty households, are now the country's biggest savers (see chart). Both the rate of retention and the furious pace of investment could be cut if companies were made to pay dividends. At the moment, China's state-owned enterprises (SOEs), which most of the biggest still are, do not pay dividends to their main shareholder, the state.
Louis Kuijs, an economist with the World Bank in Beijing who has studied the issue, calls this “remarkable”. The reasons are historic. Before economic reforms began, state firms simply received all financing from the government budget and remitted any profit. In the 1980s SOEs were gradually given more independence and allowed to keep some profits in order to motivate managers and staff. Though sensible, this system broke down in practice as every state firm—after several rounds of consolidation, there are still 169,000 today—haggled over the precise share of earnings it could retain. China's 1994 tax reform cleared all that up, by setting a non-negotiable corporate tax rate (now around 33%, about double that for foreign firms). In return, companies could keep all their post-tax profits.
This mattered little in the early 1990s, when most SOEs made no money and needed any cash they generated to restructure themselves and repay debt. Nowadays, however, they are rather profitable. China's 169 biggest industrial state firms—a list that includes PetroChina, China Mobile and Baosteel—declared net profits of 600 billion yuan ($75 billion) last year, up from 400 billion yuan in 2004. A wider group of 450 big SOEs made 331 billion yuan in the first five months of this year, according to the State-owned Assets Supervision and Administration Commission (SASAC), which oversees them.
Extracting some of that profit in the form of dividends would force these firms to be more circumspect in how they spend the remainder, improving capital allocation and cutting back the wasteful investment and overcapacity so prevalent in China. It would also reduce the cash available for speculating in property and equity markets or for expansion into new, usually unrelated business lines—what Peter Lynch, a star American fund manager, once called “diworseification”. Unfortunately, many managers in China are susceptible to both temptations. Forcing firms to rely more on external sources of financing should give China's capital markets a boost. And empirical research suggests that there is a link between high dividend pay-outs and good corporate governance.
There are macroeconomic benefits as well, says Mr Kuijs. Forcing greater financial discipline on SOEs should reduce pro-cyclical investment and thus China's tendency to swing from boom to bust. The money yielded could probably be spent more productively elsewhere. In fact, the World Bank points out, if even half of SOE's 2004 profits, estimated at 6.5% of GDP, had been spent on education and health, government spending in those areas would have been 85% higher. Such a boost—enough to waive all school fees, nationally—might persuade ordinary citizens to save less and spend more, leading to the rebalancing of consumption and investment that policymakers have long sought.
The authorities in Beijing are well aware of these arguments. Zhou Xiaochuan, the central-bank governor, called on state firms to pay dividends in a speech at the end of last year. Li Rongrong, the head of SASAC, calls for this regularly. In February his officials said that a plan was being drawn up. To prepare, officials have made forays to Scandinavia, whose state-company dividend policies are regarded as a model.
That nothing concrete has happened can be blamed partly on China's glacial policymaking and partly on resistance from local bureaucrats who want investment in their provinces to continue at full steam. But it also has something to do with a ministerial battle over who would control the funds. SASAC would collect them and Mr Li, who makes much play of his role as an “investor”, would undoubtedly like to manage them, turning his agency into an imitation of Temasek, Singapore's state investment company. The Ministry of Finance, however, says it should allocate the cash, especially since it paid for the losses and reorganisation of the SOEs in years gone by. Whoever wins, some action seems certain, given the need to cool the economy. For China's state firms, can't pay has already turned into won't pay. Must pay is surely not far behind.