A just-released World Bank analysis notes that SOEs overseen by the central government's State-Owed Assets Supervision and Administration Commission (SASAC) made net profits of RMB 299 billion during the first half of 2005 and RMB 400 billion in 2004.  All non-financial SOEs, including those administered by provincial and municipal authorities, earned RMB 759 billion in 2003.  Some publicly-listed SOEs do pay significant dividends.  But, for historical reasons largely associated with China's 1994 tax reform, no government entity -- neither the Ministry of Finance (MOF) nor SASAC -- receives any dividends from large centrally-administered SOEs.  This pattern mostly applies as well to local governments and locally-administered SOEs.  This is in contrast other countries, where the state, as key shareholder, normally receives dividends from SOEs, just like any other shareholder.

A sound dividend policy for China's SOEs could enhance the efficiency of re-investments by SOEs and improve the overall allocation of public financial resources.

Corporate sector saving -- including by SOEs -- is a key contributor to China's high rates of saving and investment.  At about 20 percent of GDP -- double the share in the U.S. and France -- retained earnings finance more than one-half of enterprise investment. 

Excessive use of retained earnings to facilitate industrial expansion poses disadvantages, however, for China's developing economy.  Within-firm allocation of capital may not receive the same scrutiny as channeling via the financial sector, which may hurt efficiency.  Lack of scrutiny may lead to pro-cyclical investment, making the economy more prone to "boom and bust" cycles.  These issues are of particular concern where corporate governance is weak.

Notably, the State has borne most of the restructuring costs for China's SOEs, taking over social obligations such as schools and hospitals as well as unemployment benefits and worker pensions.  Indeed, the shedding of these obligations has played a big part in the rise in SOE profits -- all the more reason for the State to recover some of its costs.

Among individual companies in OECD countries, dividend payout ratios vary widely, tending to reflect each company's growth prospects and business cyclicality.

Should SOE dividends be submitted to MOF or managed by SASAC as part of a "state assets management budget?"  In principle, SOE profits and privatization proceeds are public financial revenues, whose disposition should be subject to the budget process and National People's Congress (NPC) approvals.  Better prioritization of public spending across sectors requires an integrated budgeting process in which all available public financial resources are allocated according to one set of criteria to meet public needs.

The current non-payment of dividends implicitly assumes that there is no better use of SOE profits other than re-investment back into SOEs. Clearly, however, China faces urgent challenges in refocusing its public spending to improve key services.  For example, if 50 percent of SOE profits, estimated at 6.5 percent of GDP in 2004, were distributed to the budget, this would support an 85 percent increase in government spending on education and health.

Among OECD countries, the norm is for SOE profits to go to the finance ministry for general public uses, whichever agency acts as state shareholder.

Thus, while SASAC acts as the state shareholder, both theory and international best practices suggest that SOE dividends and any privatization proceeds should go to the MOF.  This may give rise to practical concerns, for instance about SASAC's incentives to collect dividends and its capacity to finance ongoing structural reforms among SOEs.  Further debate on the still-undefined nature of a "state assets management budget" and SASAC's role in ongoing structural adjustment of China's SOEs is warranted.  Whichever approach to dividend distribution is adopted, SASAC's budget and resources should be subject to the same NPC scrutiny as any other fiscal resources.

(China.org.cn February 10, 2006)