China's state-owned
enterprises had a combined profit of 628 billion yuan ($78 billion) last year,
slightly more than General Electric Co. has earned in all of the past five years
combined.
While GE shareholders received about $40 billion, or 52 percent of the
company's total earnings, as dividends, the Chinese government got a big zero.
Last year was no fluke. Since 1994, state-owned enterprises affiliated with
the federal government haven't paid any dividends even though many of them have
benefited handsomely from China's emergence as a manufacturing powerhouse.
This ``no-dividend'' strategy is being pursued not only by the 169 federally
controlled companies, whose profit rose almost 28 percent last year, but also by
most of the 138,000 enterprises administered by provincial and municipal
governments.
In a nutshell, the state in China isn't getting a return on the capital that
it has deployed to provide jobs for some 43 million people. This is damping
China's aspiration to realign the focus of economic growth from exports and
investments to domestic consumption.
When the majority shareholder doesn't have to be paid a share of the profit,
it becomes a lot easier for managers to reward themselves with excessive
corporate perks.
"Within-firm allocation of capital does not receive the same scrutiny as
channeling it via the financial sector," the World Bank's China office noted in
its recent quarterly update on the economy.
Distortions
A captive source of money also leads to serious macroeconomic distortions.
Take, for example, the government's plan to discourage the building of
another wholly unnecessary steel plant amid a nationwide glut. A government
diktat to banks asking them not to finance such a project won't have the
intended effect as long as managers in state-controlled firms decide to build
the plant anyway with internal accruals.
As Raghuram Rajan, the chief economist at the International Monetary Fund in
Washington, pointed out in a speech in November, "it is unlikely the chairman of
a state-owned corporation will prefer to return cash to the state via dividends
rather than retaining it in the firm, particularly when banks are under orders
to restrain credit growth."
State-owned company profits represented 3.3 percent of China's gross domestic
product and 20 percent of the government's fiscal revenue last year, according
to the World Bank.
Getting some of the money out of corporate treasuries and into the
government's coffers will be a key plank of what economists have identified as
the most-populous country's biggest challenge -- a "rebalancing" of its growth
model.
Overinvestment
"For the past 27 years, China's remarkable growth story has been built
largely on a foundation of resource mobilization -- powered by the recycling of
a huge reservoir of domestic saving into exports and investment-led growth,"
Morgan Stanley Chief Economist Stephen Roach said in an April 24 report. "This
strategy has now outlived its usefulness."
Investment threatens to exceed 50 percent of China's GDP, from about 45
percent in 2005, he said.
"In their earlier heydays of economic development, this ratio never got much
above the low-40 percent range in either Japan or South Korea," Roach said.
China's recently enacted 11th Five-Year Plan aims to improve the quality of
economic growth by paying more attention to the environment, which has been
severely damaged by reckless exploitation, and to the inequitable distribution
of income.
A clear dividend policy would go a long way toward bringing about the desired
rebalancing of the economy.
A Dividend Policy
"Probably the most effective way to change the composition of demand towards
consumption is to move ahead on a dividend policy for state-owned enterprises
and to ensure that the revenues go through the overall budgeting process, so
that they can finance reforms in education, health and social security," the
World Bank said in its quarterly report.
In recent months, policy makers in China have been vocal in demanding a
change to the no-dividend practice.
"Owners have the right to receive dividends," Zhou Xiaochuan, the governor of
the Chinese central bank, said in a speech in Beijing in December.
Getting to exercise this right, however, won't exactly be a cakewalk for the
government. Even in the case of a state-controlled company whose shares are
publicly traded, the government doesn't receive any of the distributed
dividends, which accrue to a holding company.
Although it's fully state-owned, the holding company doesn't release any of
the dividends it receives into the exchequer. Instead, it retains the cash for
acquisitions, expansions or for spending on other subsidiaries.
Long March
The Chinese government appears to have made up its mind: The no-dividend
practice must go.
The Finance Ministry has devised a plan for state-owned companies to share
profits with the government, the South China Morning Post reported in February.
The Finance Ministry, however, is just one of the actors in this theater. An
important question is how the State-Owned Assets Supervision and Administration
Commission, the shareholder agency of the government, responds to any proposal
that foresees all the dividends -- and the power that goes with the cash --
being passed to the Finance Ministry. Won't SASAC, as the commission is known,
want to retain at least one share of the proceeds before passing on the rest to
the Finance Ministry?
The intra-government issues will, hopefully, get solved for the sake of the
larger interest. If the Chinese government can spend its dividend booty on, say,
paying higher wages to underpaid teachers in rural areas, it will be taking a
much- needed first step in what seems to be a long march to sustainable
growth.