China Increases State Company Pay-Outs

China will require most of its largest state-owned enterprises to pay larger dividends to the state next year to help rebalance the economy and funnel more money into the country’s underfunded public services.

The country’s largest petrochemical, tobacco, telecom and power generation companies will have to pay 15 percent of their post-tax profits to the government, up from the current dividend of 10 percent, according to a directive from the Ministry of Finance.


Those eligible include the parent companies of offshore-listed enterprises PetroChina, Sinopec, China Mobile and China Telecom.

State-owned companies in the trade, construction, transport, mining and steel sectors, including national champions Baosteel, Air China and Chinalco, will be required to pay 10 percent of post-tax profits to the state, up from the current 5 percent.

China’s 122 largest state-owned enterprises are expected to post total combined full-year profits of more than 1,000 billion reminbi for the first time this year, according to the State-owned Assets Supervision and Administration Commission, which owns and regulates these companies.

Through this handful of enormous enterprises that dominate their respective sectors, the Chinese state, and by extension the Communist party, maintains tight control over the commanding heights of the economy.

Economists wryly note that China is a Communist country in which labour subsidizes capital on a huge scale and the government’s latest five-year plan, which goes into effect next year, is partly intended to tackle this imbalance.

By taking some of the profits away from state enterprises, Beijing hopes to reduce the amount they can invest, especially in sectors that are suffering from overcapacity, and gradually increase the share of consumption in the country’s growth.

Increasing Chinese consumption is also seen by politicians and economists around the world as a way of addressing global trade and economic imbalances and providing new markets at a time of stuttering growth in developed economies.

The Chinese government has suggested the higher dividends will help pay for better social services such as health, education, public housing and social security, which remain underfunded and inadequate across much of the country.

A third category of state companies, mostly research institutes and military equipment manufacturers, will have to pay 5 per cent of their post-tax profits to the central government for the first time next year.

China’s largest enterprises were required to pay dividends to the state for the first time in 2007 after more than a decade of restructuring that saw them fire tens of millions of people and carve off hospitals, schools and other social services to become profitable enterprises.

Many went on to sell minority stakes on public stock exchanges at home and abroad.

Combined with the virtual monopoly positions these enterprises occupy in their respective sectors, that process has allowed the largest 122 companies to double their net profits in just the past five years , according to government figures.

It has also provided them with financial firepower to expand into overseas markets and this year about a third of these companies’ total profits will come from “business conducted abroad”, according to Wang Yong, the newly appointed head of Sasac.

The government has not released reports on the progress of the dividend payment scheme but in private officials say Sasac has found it very difficult to force some powerful state enterprises to hand over the money.