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Geopolitics

Giving The Chinese People A Bigger Slice Of The Economic Pie

The fourth U.S.-China Strategic and Economic Dialogue yielded an important reform: Chinese state-owned firms must turn over a bigger chunk of their profits to the government to help finance public spending. U.S. companies are pleased -- and ordinary Chine

Giving the people something to smile about (fab to pix)
Giving the people something to smile about (fab to pix)
经济观察报E.O/Kang Yi

BEIJING -- 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 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 lower interest rates than private companies, 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 U.S. have being developing legislation for boycotting Chinese state-owned enterprises. This would make the investment environment for China's state-owned enterprises overseas much more complicated.

It's very obvious that the reason why the Chinese government made such a high-profile commitment is because it's trying to distance itself from the accusation of "State Capitalism" and to erase the intricacies of its relationships with SOEs. It also wants to make it easier for its state-owned companies to invest overseas.

Regardless of this policy's agenda, what Chinese people want is for this policy to boost social spending, something it would definitely benefit from.

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

A new economic context

It should be noted that many government-funded companies' profits have seen rapid growth year after year. They can easily turn over a higher proportion of their dividends. Passing their decreased profits onto consumers as price hikes will be seen by the public as further proof of their lack of conscience.

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

After all, in theory, the people are all shareholders in the state-owned enterprises. The current reality is that most of the SOEs' dividends are recycled in house, to be used for reform and development. Only a tiny proportion of their profits end up in public finances and the social security budget.

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 "State capital management budget" was started a few years ago, a lot of central government-funded firms were struggling with huge deficits. The proportion of dividends paid to the government was set at a very low 5% or 10%. Most often these dividends were recycled into the companies to improve their capitalisation.

Today, the environmental context has largely changed. Most SOEs' turnovers and profits have grown. It seems fair that they should contribute more to public finance.

These dividends should be transferred to the state budget to increase governement revenues. 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 generosity to state-owned firms should not be indefinite.

Read the original article in Chinese.

Photo - fab to pix

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