The miracle of China's disappearing dividend


Other evidence points to a bigger concern about growth. Take the performance of China's state-owned enterprises (SOEs), which still dominate the economic landscape. A recent report by the State-owned Assets Supervision and Administration Commission, which oversees China's largest SOEs, suggests their returns remain poor.

The report, presented at last November's Communist Party Congress, trumpeted the increase in profitability in the Hu era: Between 2003 and 2011, the combined net profit of SOEs increased by roughly four-and-a-half times, to 914 billion yuan. But this is less impressive when considering that the same companies had more than three times as many assets at the end of that period as they did at the beginning.

In other words, most of the expansion in the earnings of those SOEs came from expanding their balance sheets; the combined return on assets improved only slightly, to 3.26 percent. That's less than half the average for a member of the S&P 500 index, and even these mediocre figures are puffed up-compared to private-sector rivals, most state-owned companies get preferential pricing for raw materials, energy and credit.

In this sense, China's SOEs are a proxy for the country's investment-heavy growth in recent years, particularly after the 2008 financial crisis dulled global demand for Chinese exports. By most estimates, gross fixed capital formation accounted for around 45 percent of China's economic GDP between 2008 and 2011-much higher than in other developing nations. In a nutshell, China has been investing ever-increasing amounts to generate additional economic growth, and the returns on this investment have been poor.

This analysis has prompted many to predict an imminent end to China's economic miracle. As returns dwindle, flows of new capital dry up, and growth stalls. Yet this logic assumes a market-based system of capital allocation that is largely absent from China's financial system. In fact, much capital is distributed by the country's state-owned banks and guided by the Party's political priorities. The banks, meanwhile, are financed with deposits that pay an interest rate capped at levels that for much of the past decade were below the rate of inflation. In other words, Chinese banks are cheating their millions of depositors so that they can make too-cheap loans to SOEs.

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