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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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number
162009.
Length: 27 pages Date of creation: Apr 2009 Date of revision: Handle: RePEc:hkm:wpaper:162009
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Find related papers by JEL classification: G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment O53 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
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