Related to my post on Sunday on macroeconomic issues, a couple of interesting stories in the Financial Times on State-owned Enterprises caught my attention. The first discusses how the fortunes of many SOEs have turned around and that many are now quite profitable under the leadership and direction of the State-owned Assets Supervision and Administration Commission (Sasac). Sasac companies are doing nicely and plowing their profits into investment, not all of which is productive, according to Li Rongrong, the Chairman of Sasac who has instituted reform to combat the problem.

One of the biggest changes under Mr Li’s watch has been the investment behaviour of state companies. Once almost totally reliant on bank loans, many of which went bad, Mr Li says state companies now fund 61 per cent of investment through retained earnings.

“One of my requirements is that the enterprises should fund their investment mainly from their own profits to prevent risks,” he says. “The loans from the banks have been greatly decreased.”

The state companies have also been forced to concentrate on their core businesses and pull back from their favourite speculative playgrounds of real estate and the stock market.

Back to my earlier post. In order to rebalance the economy, the focus is on the service sector, domestic consumption, and innovation. Using profits of SOEs to buy real estate does not further these goals. However, when you have huge pools of cash, you have to put that money somewhere, and some of those investment decisions have been really poor.

What makes better sense? Well, for one thing, that capital could be better allocated through the financial sector instead of direct investment by SOEs. Even better, the shareholders should enjoy some of those record profits instead of keeping them as retained earnings. This brings us to the second FT article, which discusses SOE dividends:

Chinese state companies are likely to pay dividends for the first time in more than a decade next year, potentially trimming China’s investment boom and raising tax revenues, according to the head of the state industries agency.

Who is the "head of the state industries agency"? None other than Mr. Li, of course, whose job with Sasac is to make sure that the interests of the shareholders are being taken into account. This is a new source of revenue to the government, though, so there is of course disagreement on how the money should be spent:

Mr Li said that, in the first two years of the policy, the dividends should be used to complete the reorganisation of the companies and, after that, to invest in areas they are now weak in, such as research and development.

However, the finance ministry believes that the dividends should be paid into the fiscal budget and is pushing for that to happen. A ministry of finance official said yesterday that it was “difficult to say” how the money would be paid because the issue was still under discussion.

The World Bank has argued that the dividends should form part of the fiscal budget and says the money could help with much-needed spending on health and education.

I think the important thing here is that these dividends get paid and the incentive to invest in bad projects is reduced. Whether the money goes to R&D or education or health spending, this is all part of the "harmonious society" debate and is all for the better.