More dividends good for society

State enterprises must pay out higher share of profits to avoid reckless expansion and help narrow the widening wealth gap

As part of its positive responses to US concerns at the just-concluded Sino-US Strategic and Economic Dialogue, China will require State-owned enterprises to pay a higher percentage of their earnings as dividends to the State and increase the number of companies that have to pay dividends. It has also made commitments to include the budget of State capital operations into the national budgetary system and improve dividend-paying regulations.

Such commitments conform to the development direction of China's ongoing economic reforms, as the dividends paid out by SOEs are the crux of its much-anticipated reforms of State companies.

During this year's sessions of the National People's Congress and the National Committee of the Chinese People's Political Consultative Conference, Li Rongrong, former head of the State-Owned Assets Supervision and Administration Commission, proposed SOEs should pay 25 percent of their earnings as dividends. Currently, SOEs under SASAC are required to turn over less than 15 percent of their profits. Some enterprises even have no obligation to hand over any of their profits.

Take the country's oil industry: Sinopec, CNOOC and CNPC, China's three major State-owned oil producers and suppliers, achieve a combined profit of hundreds of millions of yuan a day. However, they have failed to turn over to the country the dividends expected. A number of other State-owned enterprises not affiliated to the SASAC, such as the Industrial and Commercial Bank of China and the other four major State-owned banks, which reap higher profits than the country's three oil giants, are not even on the list of enterprises that are required to pay dividends.

As the first step in reforming SOEs, China should raise the dividend requirement and should set up a unified system in which all targeted SOEs should be included and different dividend rates established according to their respective profit-making conditions.

In view of the nature of China's SOEs, such a reform is unavoidable and should be launched as early as possible. The preferential policies the country extended to its struggling SOEs in the past should not be regarded as inviolate.

At a time when some SOEs are very profitable, paying only a small proportion of their earnings as dividends or not paying dividends at all will cause problems for themselves and for the country. Given that the country has so far failed to set up a well-developed governance structure for domestic SOEs, to allow individual enterprises to hold on to the majority of their profits will increase their investment impulse or lead to reckless expansion. This will cause difficulties for State monitoring and supervision of SOEs and trigger the collapse of their funds chain.

At the same time, individual enterprises may also choose to use self-retained money to raise the incomes and welfare of their employees and management personnel instead of conducting technological improvements and industrial upgrading, this will widen the wealth gap.

In recent years, especially since the start of the global financial crisis, China has excessively depended on the expansion of industrial capacity instead of on development and innovation to promote national economic growth. Such a development model is unsustainable and needs to be changed.

As part of these much-needed reforms, the country should raise the dividend payout required of domestic SOEs and allow private enterprises to have a bigger role in the national economy.

Raising the dividend requirement for SOEs will also aid the country's ongoing efforts to make fiscal and tax adjustments. At the same time, the increased government revenues will increase the government's ability to spend more on social security and pensions. This will help reduce the country's long-running high deposit ratio and encourage people to spend more, thus stimulating domestic demand and boosting the driving forces of the country's economic growth.

China's economic reforms are entering a crucial and arduous period, as reflected by the slow progresses it has achieved in reform of its SOEs.

Undoubtedly, reforming SOEs will antagonize those with vested interests in preserving the status quo and will thus encounter obstruction and opposition. But the country should be well aware that SOEs should be for the advantage of all citizens and not just certain groups. It should start reforming SOEs by raising the proportion of profits paid out as dividends and then try to develop them into companies that really serve the public.

The author is a senior editor with the Study Times