End of the Gilded Age?

Big SOEs to hand over more of their $129 billion profits to state coffers

End of the Gilded Age?

Sasac makes a cash call

Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” That was the rather dispiriting insight from John D Rockefeller, America’s first ever dollar billionaire.

But it’s a view that might strike a partial chord with top officials at China’s State-owned Assets Supervision and Administration Commission (Sasac), who announced late last month that they would be clawing back a bigger share of the profits from the hundred or so state giants under their supervision.

Of course, Rockefeller made his fortune from Standard Oil’s virtual monopoly position in late nineteenth century America. And a number of the firms on the Sasac list have also benefitted from a similarly exalted position. Now it’s time to pay a little more for the privilege, the State Council has decreed.

The background, according to Barry Naughton, an economist at the University of California in San Diego, is the longer-term struggle to collect a greater share of after-tax profits from the leading state firms. These enterprises had a free ride for 13 years after 1994, when they were not required to remit anything at all to the central government (dividends were instead accrued at “holding company” level).

Not that there was always much profit to remit – many of the companies were in a dire financial condition. But times have changed, especially for the largest companies on the Sasac list, many of which have become hugely profitable. Last year, the grouping produced total profits of Rmb815 billion (about $123 billion). Full-year profits for 2010 are expected to pass Rmb1,000 billion.

Back in 2007 a new dividend programme was launched, requiring a small number of firms (including China Mobile, PetroChina and State Grid) to pay 10% of after-tax profits, and a larger group to pay 5%. A third grouping – mostly research institutes and defence manufacturers – paid nothing. This was a disappointment to Sasac’s top officials, who had argued that something closer to a 30% share of profits was appropriate. But the amount was reduced after resistance from the company bosses themselves.

The improved financial performance of a number of these firms has meant that the level of contribution has come up for review, given they handed over Rmb157.22 billion from 2007 to 2009, or less than 1% of total government revenue. So under the new rules the contributions are being increased. A group of 15 companies (including the major energy and telecommunications firms) must now pay more (15% of profits in dividends), another 78 companies will pay 10%, and 33 others will pay 5% (most of these will contribute for the first time).

Of course, Sasac has not always found it easy to enforce its mandate in forcing through consolidation or closing down unprofitable businesses (see WiCs 45 and 87). We also reported last year on its frustration that many of its charges had been punting in non-core areas, especially property. The new scheme is in part seeking to reduce some of the funds available for speculative investment, says the Economic Daily.

The SOEs, on the other hand, will have done their best to resist the current proposals, arguing for the need to retain their cash to fulfill commitments on international investments or building brands that can compete overseas. Most analysts query whether corporate investment plans need necessarily suffer, arguing that the bigger firms can get soft loans from the state-owned banks anyway.

But some of the coverage in the domestic media also suggests a change in the tone surrounding the new programme. Previously, Sasac’s claim on profits was largely framed in terms of finding funds for its restructuring efforts (i.e. to be spent on closing, consolidating or refocusing the firms within its control).

This time around the scope seems to have widened. These centrally administered companies have to pay out more, reported the Shanghai Daily, because China is spending more on social services, like healthcare, education and public housing, as it beefs up efforts to improve the social safety net.

Not that Sasac has given up on its restructuring mandate altogether. Far from it: the Chinese media has been reporting since late December on the creation of a new entity – China Guoxin Holdings – to accelerate efforts in this area.

Guoxin – whose name means ‘China Reform Holdings’ in English – is expected to focus on the smaller firms in the Sasac group deemed to be of less strategic importance to China’s economic security (the 21CN Business Herald holds up China Minmetals as one in that category). If successful, Guoxin could then turn its attention to remodelling other “non-core” enterprises not currently on the Sasac roster. Sasac has set up two similar asset management companies before – China Chengtong Holding and State Development and Investment Corp – and it is not immediately clear how Guoxin’s role will be different. But some think that it will do more to provide services similar to a company doctor role, which might mark official frustration with the speed of restructuring within the original Sasac-managed group. Sasac has managed to reduce the number of SOEs within its purview from 196 to 122. But the pace of reform seems to have eased off recently, reports the Financial Times, and Sasac has missed its own target of reducing the number of companies under its remit to 80-100 firms by the end of last year.

Perhaps, then, this is the latest attempt to get on with its work. The Global Times thinks so, suggesting that between 20 and 30 of the smaller-sized SOEs can expect to be restructured in the next three years. The China Securities Journal meanwhile reported yesterday that Guoxin will list 16 firms in China and Hong Kong this year.

All the activity may signal a shake-up in approach following the retirement of Sasac’s former boss Li Rongrong last summer, and the new regime of Wang Yong.

Wang is, for example, said to be behind the proposed merger of train makers CSR and CNR, reports the 21CN Business Herald. This would make some sense. In WiC82 we reported how the two firms have engaged in cut-throat competition to win local subway system contracts. A merged entity would not just dominate the domestic train market but also prove formidable selling high-speed trains abroad.

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