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Honor Thy Creditors Beforan Thy Shareholders: Are the Profits of Chinese State-Owned Enterprises Real?

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  • Giovanni Ferri

    (University of Bari)

  • Li-Gang Liu

    (BBVA)

Abstract

The Chinese state owned enterprises (SOEs) have become quite profitable recently. As the largest shareholder, the state has not asked SOEs to pay dividends in the past. Therefore, some have suggested that the state should ask SOEs to pay dividends. Indeed, the Chinese government has adopted this policy advice and started to demand dividend payment starting from 2008. While we do not question the soundness of the dividend policy, the point we raise is whether those profits are real if all costs owned by SOEs are properly accounted for. Among other things, we are interested in investigating whether the profits of SOEs would still be as large as they claim if they were to pay a market interest rate. Using a representative sample of corporate China, we find that the costs of financing for SOEs are significantly lower than for other companies after controlling for some fundamental factors for profitability and individual firm characteristics. In addition, our estimates show that if SOEs were to pay a market interest rate, their existing profits would be entirely wiped out. Our findings suggest that SOEs are still benefiting from credit subsidies and they are not yet subject to the market interest rates. In an environment where credit rights are not fully respected, dividend policy, though important, should come second and not first.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 162009.

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Length: 27 pages
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:hkm:wpaper:162009

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Keywords: State Owned Enterprises; Soft Budget Constraint; Dividend Policy;

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  1. Loren Brandt & Hongbin Li, 2002. "Bank Discrimination in Transition Economies: Ideology, Information or Incentives?," William Davidson Institute Working Papers Series 517, William Davidson Institute at the University of Michigan.
  2. Cull, Robert & Xu, Lixin Colin, 2000. "Bureaucrats, State Banks, and the Efficiency of Credit Allocation: The Experience of Chinese State-Owned Enterprises," Journal of Comparative Economics, Elsevier, vol. 28(1), pages 1-31, March.
  3. Cull, Robert & Xu, Lixin Colin, 2003. "Who gets credit? The behavior of bureaucrats and state banks in allocating credit to Chinese state-owned enterprises," Journal of Development Economics, Elsevier, Elsevier, vol. 71(2), pages 533-559, August.
  4. Chong-En Bai & Jiangyong Lu & Zhigang Tao, 2006. "The Multitask Theory of State Enterprise Reform: Empirical Evidence from China," American Economic Review, American Economic Association, American Economic Association, vol. 96(2), pages 353-357, May.
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Cited by:
  1. Dennis Tao Yang & Junsen Zhang & Shaojie Zhou, 2012. "Why Are Saving Rates So High in China?," NBER Chapters, in: Capitalizing China, pages 249-278 National Bureau of Economic Research, Inc.
  2. Yang, Dennis T., 2012. "Aggregate Savings and External Imbalances in China," IZA Discussion Papers 6964, Institute for the Study of Labor (IZA).
  3. Lin, Justin Yifu & Treichel, Volker, 2012. "The unexpected global financial crisis : researching its root cause," Policy Research Working Paper Series 5937, The World Bank.
  4. Lee, Jongchul, 2013. "Income Inequality In Urban China And The Role Of State Sector," Hitotsubashi Journal of Economics, Hitotsubashi University, Hitotsubashi University, vol. 54(2), pages 159-176, December.

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