The Hazards of Being China-Owned

The government wants more dividends from its companies | “They have given the state sector a warrant to do whatever it wants”

Dexter Roberts

The Chinese are experts at letting important news slip out quietly. The latest example: a May 4 announcement made during annual bilateral talks with the U.S. that the SOEs will increase the amount of dividends they pay to their owner, the state.

Some 100,000 government-owned and -controlled enterprises use their favored status and ready access to cheap land, loans, and energy, to become ever more powerful. If they can hold onto most or all of their earnings, they can tighten their grip on the economy. If the central government can coax higher dividends out of them, it can better fund badly needed social programs — and weaken the SOEs as well.

Why would policy makers want to weaken the SOEs? More than a decade after money-losing state enterprises were shuttered and millions of state workers laid off, government companies today dominate aviation, railways, steel, telecom, finance, energy, and electricity. That trend, which took off following the massive stimulus package launched in 2008, is called guojin mintui — “the state advances, the private sector retreats.”

As growth slackens, new scrutiny is being put on state-led capitalism. On April 3, Premier Wen Jiabao delivered a speech attacking the monopoly powers of the state banks. Wen and other officials worry the SOEs are growing so strong that they will smother the private sector. Wen’s ally in this struggle is Liu He, the Harvard-educated deputy director of the Development Research Center, which is part of the State Council. The DRC has pushed the dividend issue for years.

On the other side of the struggle is the State-Owned Assets Supervision and Administration Commission, created in 2003 to oversee the state sector. The most influential official at the commission is Vice Chairman Shao Ning, a lifelong bureaucrat who as a teenager was caught up in the Cultural Revolution and shipped to a remote part of Shaanxi province to work on a farm. His ambition is to build state-owned companies that can rival the largest multinationals.

Shao has advanced his agenda well. SOE revenues have risen from around 40 percent of China’s economy five years ago to more than one-half today, estimates Fred Hu, chairman of financial advisory firm Primavera Capital Group. “We have seen the government preside over a significant expansion of state monopoly power,” says Hu. “If this trend is not stopped, [the future of] China’s vibrant, fast-growing, competitive economy is very much in doubt.” The commission has ensured that most dividends collected now go straight back to the SOEs.

Today the top 117 state companies, which are directly controlled by the commission, include China Mobile, Baosteel Group, and other big players. Last year the revenues of the 117 grew by 20.8 percent, to 20.2 trillion yuan, ($3.2 trillion), while profits rose 6.4 percent, to 917 billion yuan. “By restructuring them and restraining competition, they picked up their profitability,” says Barry Naughton, a professor of economics at the University of California, San Diego. “They have given the state sector a warrant to do whatever it wants.”

Most Chinese government companies still pay no dividends, and the top rate for even the most profitable ones is 15 percent of profits. By contrast, state-held enterprises in other countries issue dividends that average 33 percent of profits, says Louis Kuijs, an economist at Fung Global Institute who previously worked at the World Bank.

With China’s state-led investment boom running out of steam, many now recognize that profligate, ever-bigger government enterprises have become part of the problem, pumping easy credit into risky property and feeding other asset bubbles while private companies struggle. “State banks rarely give loans to private enterprises,” and the resulting credit crunch has caused many to go bankrupt over the last year, says Chen Jun, vice chairman of the Zhejiang Chamber of Commerce in Beijing.

Reports of lush salaries, generous perks, and corruption in SOEs are angering Chinese. The assets commission, along with the finance and supervision ministries, announced a ban on excessive spending on May 9. The fact that princelings, the progeny of revolutionary leaders, are often involved in China’s most powerful SOEs makes clipping the companies’ wings more difficult, says Hu Xingdou, a professor of economics at Beijing Institute of Technology. He estimates that hongerdai — literally, the “second-generation red” — run 90 percent of the biggest companies. “China has a power-based economy, not a market one.”

The bottom line With revenues at the top state companies growing 20 percent, China’s reformers fear SOEs are smothering the private sector.


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