Tuesday, February 14, 2006

Well, well, it seems MOF is determined to get a slice of the enormous SOE profit. There will be some hard bargaining ahead. The problem is that SASAC-run "holding companies" are reaping the fruits of the current profit, and SASAC officials will be hard-pressed to give it up. As I indicated in a previous post, there will be some compromise whereby SASAC gets even more control over SOEs while MOF gets more dividend either for the state budget or for the social security fund. Even though Wen is behind the MOF on this issue (for example, this money will really help with rural schooling), he will not order SASAC to give up the dividend. Wen's strength, and his weakness, is his ability to broker compromises. This stands in sharp contrast to his predecessor Zhu Rongji. There will likely be a compromise, brokered by Huang Ju, who is the vice-premier in charge of SOEs.

Cashed-up state firms told to pay dividends Beijing plans to collect payments as SOEs post 600b yuan in net earnings
610 words
14 February 2006
South China Morning Post
(c) 2006 South China Morning Post Publishers Limited, Hong Kong. All rights reserved.
The central government is planning to force large state-owned enterprises to pay dividends to the state after companies overseen by State-owned Assets Supervision and Administration Commission (Sasac) posted more than 600 billion yuan in net profit last year.

"The Ministry of Finance has already completed a plan for state-owned profit allocation and Sasac is in the process of preparing a similar plan for the companies under its control," said Su Guifeng, a spokesman for Sasac.

"I cannot give an exact timetable, but once we have completed the plan, state enterprises must pay dividends to the state."

Central bank governor Zhou Xiaochuan voiced support for the scheme in a speech late last year.

The World Bank, in its just-released quarterly update, also recommended that large profitable state enterprises pay dividends to the Ministry of Finance, which can use the money to pay for reforms in education, health and social welfare.

Since tax reforms were implemented in 1994, no government entity has received any dividends from the 169 large state enterprises under Sasac. The same is mostly true for state firms administered by local governments.

"SOEs always come to the government asking for help when they lose money, so, when they make good profits, they should allow their shareholder [the state] to benefit. It's as simple as that," said Qu Hongbin, an HSBC economist.

Bumper profits at state-held firms last year came mostly from natural resource companies benefiting from strong prices of oil and other basic materials.

Without requiring them to return profits to the state, state enterprises are prone to excessive investment and pro-cyclical investment behaviour that exacerbate China's boom and bust cycles.

Large state enterprises also have very high levels of corporate savings, a major contributor to the mainland's unnaturally high domestic savings rate.

"Dividend payouts to the state will help to lower the high savings rate and rebalance the economy," Mr Qu said. "The government can use the money for health and education and shift economic growth more towards consumption."

The World Bank recommends the payment of dividends back to the state as a way of improving corporate governance at state enterprises through the greater government scrutiny that it will involve.

Despite high-level agreement on the need for reform, an internal debate is raging over which agency will be responsible for collecting and allocating the dividends, according to William Mako, a specialist at the World Bank.

"In terms of theory and international best practice, the dividends should go to the Ministry of Finance but there are all sorts of institutional issues and Sasac has a claim on them as well," Mr Mako said.

He pointed out that many listed state enterprises already paid dividends to a parent holding company, which is not required to pass these on to the state.

"The parent enterprise groups may use the money to pay for pension liabilities but they can also use it to invest in commercial property," Mr Mako said.

Management at large state firms and their parent companies are expected to resist having to transfer profits to whichever government department is eventually named.

"If you are the chief of an SOE and if there is some way the corporate governance structure will allow you to not pay dividends to shareholders, then of course you will be happy," Mr Qu said.

The profits of Sasac-administered state enterprises last year accounted for 3.3 per cent of gross domestic product, equal to 20 per cent of fiscal revenue.

You neglect to mention in your analysis that Huang Ju has not been seen publicly for over a month, and there is mounting speculation as to his health (both physical and political).
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