Thursday, May 31, 2007

Exciting news (no kidding!): SOEs to pay dividends

Maybe doesn't sound like a big deal but it is. Starting later this year, Beijing is requiring SOEs to pay dividends to the state (the owner). Profits of SOEs for 11 months to November 2006 were about $90 billion. This year they are growing 15-20% or more. To be sure, China has a trillion dollars of foreign exchange reserves but they actually have a great need for additional local currency funds - primarily to fund the social security fund but also for current budgetary items like health and education. Most importantly, it will prevent SOEs - less than nimble, less than wholly efficient capital allocators - from putting 100% of their cash flow into new investment. The majority of China's investment is NOT funded by state bank loans but from cash; hence slowing down investment can't be accomplished just by raising rates. One solid step in the right direction.

link to story in Shanghai daily

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