Economic Observer Online
May 10, 2012
By Kang Yi (康怡)
Translated by Laura Lin
Original article: [Chinese]

After years of public outcry, Chinese state-owned entreprises (SOEs) are finally going to give a larger part of their annual earnings to the government to help finance social spending.

This was just one of the outcomes of last week's fourth round of the U.S.-China Strategic and Economic Dialogue (S&ED) in Beijing.

China committed "to increase the number of SOEs that pay dividends as well as to increase the amount of dividends actually paid."

The SOEs belong to the people. It is reasonable to ask that their profits be shared by the people. This has been put off for too many years.

It should be noted though, that the reason why the government agreed to this isn't due to them suddenly finding a conscience, nor is it because the Americans are advocating social justice for the Chinese people.

The U.S. considers that Chinese state-owned firms are linked too closely to the government and the banks. Not only do they get loans at preferential rates, they also get massive injections of government funds when necessary. The U.S. believes this constitutes unfair competition for American companies investing in China. Getting Beijing to agree to SOE dividend reform has been their goal for many years.

Preempting an American Boycott

It's reported that the U.S. have being developing legislation aimed at boycotting Chinese state-owned enterprises. This would make the investment environment for China's state-owned enterprises doing business abroad much more complicated.

It's obvious that the Chinese government made such a high-profile commitment because it's trying to distance itself from accusations of "state capitalism" and to downplay the extent of its relationships with SOEs.

It also wants to make it easier for its state-owned companies to invest overseas.

Regardless of the policy's agenda, Chinese people hope that the new announcement will mean a boost to social spending.

In order to help the government fullfill its pledge, we'd like to remind it - as well as the SOEs - of two things: First, the state-owned firms should not use these dividend reforms as an excuse to raise prices. Inflation in China has just started easing. Consumers are already overwhelmed by the repeated price hikes of oil and water.

Secondly, the Chinese government should commit itself to redistributing these dividends directly to the people.

After all, in theory, the people are all shareholders in state-owned enterprises. The current reality is that most of the profits made by SOEs are ploughed back in to the companies. Only a tiny proportion of their profits end up in government coffers.

In view of this, unless state-owned firms change their behaviour, their image abroad will not be improved and a better use of dividends will be not be possible.

When the system of getting centrally-administered SOEs to pay dividends was started a few years ago, a lot of firms were struggling with huge deficits and the proportion of dividends paid to the government was set at either zero, 5 or 10 percent.

Most often these dividends were collected and then reinvested back into the SOEs to help improve their capitalisation.

Today, the situation has changed. The turnover and profits of most SOEs have grown. It seems fair that they should start to contribute more to public finance.

These dividends should be transferred to the budget to increase governement revenue.

In turn, the government will be able to spend more on social security and pensions.

Even if this can't be achieved quickly, a timetable must be set. The public's unconditional support of state-owned firms should not go on indefinitly.

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