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

HKIMR Working Paper No. 16/2009

27 Pages Posted: 1 Jun 2009

Date Written: April 30, 2009


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.

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

JEL Classification: G32, O16, O53

Suggested Citation

Ferri, Giovanni and Liu, Li-Gang, Honor Thy Creditors Beforan Thy Shareholders: Are the Profits of Chinese State-Owned Enterprises Real? (April 30, 2009). HKIMR Working Paper No. 16/2009. Available at SSRN: https://ssrn.com/abstract=1412644 or http://dx.doi.org/10.2139/ssrn.1412644

Giovanni Ferri (Contact Author)

LUMSA University ( email )

Via della Traspontina
Roma, Rome 00192

HOME PAGE: http://www.lumsa.it/giovanni-ferri

Li-Gang Liu

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

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