Thursday, May 31, 2007

I am frankly pretty shocked that State Asset Supervision Administration Committee (SASAC) and the Ministry of Finance (MOF) finally reached some kind of agreement to officially take dividend from SOEs. They had been locked in a struggle over which agency will control what share of the dividend. As we found out in a recent trip, every government has a rough idea of the money that SOEs under their control have. They issue "renwu" or spending targets to them accordingly. For example, local SOEs are expected to support major construction projects launched by the local government. One can see this as a kind of dividend.....By formalizing dividend, the central government is just trying to get a larger slice of the action. I am sure we will see some kind of mechanism to channel profits of local SOEs into the central coffer. Once the center knows about a source of money, they rarely will leave it alone. Well, guess what, SOE profitability will all of the sudden plunge in many localities as local governments pressure local SOEs to hide profit from the formal budget.

China State Firms to Pay Dividends Required Payments
To Go to Government,
In Bid to Curb Growth By RICK CAREW
Wall Street Journal

May 31, 2007 BEIJING -- China's State Council said it will begin a program this year that will require state firms to pay dividends to the government, a move intended to cool rapid investment growth of many of China's biggest listed firms. The move will initially require the 158 central-government-owned companies to return a portion of profits to the state coffer. The statement posted on the central government's Web site didn't give details of the plan or specify the criteria for determining dividend levels for specific companies. China's central-government-owned companies comprise the country's largest industrial enterprises, many of which have listed units.

They include China's state-owned telecommunications operators and airlines; China's largest steelmaker, Shanghai Baosteel Group Corp.; and Asia's largest oil refiner, China Petroleum & Chemical Corp., or Sinopec. The proposal to force state-owned enterprises to pay dividends has been championed by the World Bank, which argues that it would help curb investment that has grown at annual rates above 20% in recent years.

China launched an overhaul of state-owned enterprises in the late 1990s by implementing huge layoffs and closing unprofitable factories. Those moves, coupled with an improving macroeconomic environment, have turned losses to profits for the state sector. Without shareholders demanding dividends, economists say those companies have reinvested a large portion of their profits in new projects, working against government efforts to cool the economy. The administrator of China's state-owned assets said in December that operating profits at central-government-owned companies grew 18.9% in the January-November period of 2006 compared with a year earlier, to reach 688.77 billion yuan ($90.03 billion).

China's State Council said the dividend measures will be rolled out in phases beginning with centrally owned state firms. Local-government-owned companies' dividend policies will be determined by provincial and city-level governments. Li Rongrong, chairman of China's State-Owned Assets Supervision and Administration Commission, first flagged the measures in September last year, saying they would be implemented sometime in 2007. That agency and the Ministry of Finance drafted the measures approved yesterday by the State Council. The dividend payments will be used to boost China's overall industrial development, advance high-technology industries, and supplement the social-security system, the State Council statement said. --Juan Chen contributed to this article.

Write to Rick Carew at rick.carew@dowjones.com

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