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


  • Giovanni Ferri

    (University of Bari)

  • Li-Gang Liu



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.

Suggested Citation

  • Giovanni Ferri & Li-Gang Liu, 2009. "Honor Thy Creditors Beforan Thy Shareholders: Are the Profits of Chinese State-Owned Enterprises Real?," Working Papers 162009, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:162009

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    References listed on IDEAS

    1. Brandt, Loren & Li, Hongbin, 2003. "Bank discrimination in transition economies: ideology, information, or incentives?," Journal of Comparative Economics, Elsevier, vol. 31(3), pages 387-413, September.
    2. 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, vol. 71(2), pages 533-559, August.
    3. 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.
    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, vol. 96(2), pages 353-357, May.
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    Cited by:

    1. Ronald McKinnon, 2013. "Hot Money Flows, Commodity Price Cycles and Financial Repression in the USA and China: The Consequences of Near-zero US Interest Rates," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 21(4), pages 1-13, July.
    2. Dennis Tao Yang, 2012. "Aggregate Savings and External Imbalances in China," Journal of Economic Perspectives, American Economic Association, vol. 26(4), pages 125-146, Fall.
    3. repec:eee:chieco:v:44:y:2017:i:c:p:296-310 is not listed on IDEAS
    4. Diego Anzoategui & Mali Chivakul & Wojciech Maliszewski, 2015. "Financial Distortions in China; A General Equilibrium Approach," IMF Working Papers 15/274, International Monetary Fund.
    5. Shen, Jianfu & Firth, Michael & Poon, Winnie P.H., 2016. "Credit Expansion, Corporate Finance and Overinvestment: Recent Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 16-27.
    6. 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.
    7. Lee, Jongchul, 2013. "Income Inequality In Urban China And The Role Of State Sector," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 54(2), pages 159-176, December.
    8. McKinnon, Ronald & Liu, Zhao, 2013. "Hot Money Flows, Commodity Price Cycles, and Financial Repression in the US and the People’s Republic of China: The Consequences of Near Zero US Interest Rates," Working Papers on Regional Economic Integration 107, Asian Development Bank.
    9. Lin, Justin Yifu & Treichel, Volker, 2012. "The unexpected global financial crisis : researching its root cause," Policy Research Working Paper Series 5937, The World Bank.
    10. van Treeck, Till. & Sturn, Simon., 2012. "Income inequality as a cause of the Great Recession? : A survey of current debates," ILO Working Papers 994709343402676, International Labour Organization.
    11. Ha-Joon Chang & Antonio Andreoni & Ming Leong Kuan, 2013. "International Industrial Policy Experiences & the Lessons for the UK," Working Papers wp450, Centre for Business Research, University of Cambridge.

    More about this item


    State Owned Enterprises; Soft Budget Constraint; Dividend Policy;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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