The SOE IOU
Dividend reform won't fix China SOE money-go-round
China’s elaborate money-go-round starts and ends with its cash-hoarding state-owned enterprises. So a plan to make them pay bigger dividends sounds promising. Still, if the goal is to return cash to the people, there is a long way to go.
The 117 SOEs that are managed by central government will be required to increase their minimum dividend-to-earnings ratio by five percentage points, China’s cabinet said on Feb. 5. At present, they must pay at least 5 to 20 percent depending on how profitable their industry is. Tobacco, for example, pays better than water treatment. Until 2007, SOEs didn’t have to pay anything at all.
Targeting payout ratios, though, is flawed. Many SOEs already pay more than the minimum. The biggest fifty had an average payout ratio of 27 percent over the last financial year, according to Thomson Reuters Eikon data. Besides, earnings are easily skewed by variables like how much the company invested in the past. At worst, companies might manage their bottom line downwards to avoid paying up.
What really matters is where the money goes. Some 88 billion yuan of dividends currently go to the national “capital management budget”, which is spent mainly on restructuring and nurturing those same SOEs. The state sector’s wealth would achieve more if it were funnelled into the national budget, say to help close China’s looming pension shortfall.
There are other logjams too. Bosses of top SOEs carry the same government ranking as the head of SASAC, the state asset manager that is supposed to keep them honest. Top appointments are made not by the companies’ boards, or even by China’s State Council, but by the Communist Party’s organization department. That too needs to change if companies are to be run for the benefit of their shareholders.
Until then, the bad economics continues. Industrial SOEs expanded their total assets 47 percent faster than their private sector peers in 2011, according to China’s Statistical Yearbook. The private sector’s rate of return on assets was 64 percent higher, suggesting a huge wasted opportunity. Cracking the SOE piggy bank will require a much harder hammer.