SOEs Told To Pay Up

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Further to suggestions reported in July, and again in September, last year it seems that a pilot programme will see key state-owned enterprises (SOEs) paying dividends back to the government – rather than piling profits back into fixed assets (and the stock market). According to the FT:

    “China has announced the long-awaited launch of a programme requiring state companies to pay dividends, a big policy reform aimed at cutting reinvestment of profits by many cashed-up government enterprises.

    The State Council, China’s cabinet, said on Wednesday night it would begin a pilot programme for companies controlled by the central government. Its statement did not detail how or according to what formula the dividends would be paid.

    The World Bank has estimated that a 4.8 per cent dividend pay-out from state enterprises in 2002 would have allowed the government to waive all school fees for children that year. Profits have soared since then…The State Council said that funds raised through dividends would help fund high-technology industries and support the welfare system and industrial development.”

Whenever there are big policy moves, and when big money is involved, it is interesting to remember that “the government” has many arms that are not always in agreement behind closed doors. In this case the FT notes:

    “The use of the funds has long been the subject of a tussle between the finance ministry – which argued the fund should be regarded as ordinary corporate taxes – and the government body responsible for state companies. This body has pushed to use the money to restructure those state firms still losing money.

    The two ministries appear to have settled their differences for the moment, as Wednesday’s statement represented their joint position.”

While there may now be agreement at a policy level, the implementation may still present challenges. I suspect that the local government officials tasked with collecting dividends from their friends in these big enterprises will have a tough time balancing the demands of their masters in Beijing with the desires of their friends in the bar.

I recall a similar situation when the regional offices of the People’s Bank of China were reformed some years ago. There was a story of a local bank manager who had been told by Beijing that all new loans must be approved on a commercial basis. This is what he told the local SOE manager when he refused a new loan request. So far, so good. But within a couple of weeks his child had been excluded from school, his wife was threatening to leave him, and he was under intense pressure from local officials and business leaders.

It is worth remembering that sometimes policy is easier to implement on paper than in practice. And this is especially true when company accounts are concerned, and while corporate governance leaves a lot to be desired.

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One Response to “SOEs Told To Pay Up”

  1. Archive » A Dividend from SOEs| China Business Blog Says:

    […] orporate News, Economy It was previously reported that key SOEs might have to pay dividends to the central government. Having seen profits rise by 30% in 2007, it is now con […]

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