Editor,

We much appreciate your editorial entitled "Usage of SOEs' profits (September 8)," which agrees in principle with the case for a dividend policy for State-owned enterprises. However, the editorial states that profits do not play a significant role in financing investment, that China's SOEs may not be all that profitable and that it is thus "misleading" to propose a dividend policy for SOEs.

We take issue with these points.

First, analysis of macroeconomic and banking sector data does show that enterprise savings are now the most important source of enterprise investment. Second, SOEs, just as other enterprises, have as a group become much more profitable over the last decade. Third, the case for an SOE dividend policy does not hinge on a specific rate of profitability.

Our conclusions are based on several data sources, not just National Bureau of Statistics (NBS) enterprise surveys. The national accounts show that after-tax enterprise savings, i.e. retained earnings, are now more than 20 per cent of GDP, finance more than half of enterprise investment, and that these are now far more important than any other source of finance, including bank credit.

The banking data of People's Bank of China confirm these trends: credit to enterprises, net of the increase in enterprise deposits, totalled only 618 billion yuan (US$77 billion) in 2004 and 586 billion yuan (US$73 billion) in 2005, accounting for only one-fifth to one-sixth of enterprise investment. NBS surveys show that profit margins are up: average industry profit margins increased from 2.7 per cent in 1999 to 5.7 per cent in 2005; together with rapidly rising sales, this means profits are surging.

SOEs are part of the story in China's profit boom. States Assets Supervision and Administration Commission reported that for the first seven months of 2006, profits of the major SOEs totalled 496.8 billion yuan (US$61 billion), up 15.2 per cent from last year, still outpacing GDP growth as over the last several years. Figures released by the Ministry of Finance show that the profits of all SOEs in 2005 amounted to 905 billion yuan (US$113 billion), up 25 per cent from the year before.

Irrespective of the exact level of SOE profits, we believe that a dividend policy for SOEs is desirable. Increasing dividend payouts should lead to greater scrutiny of SOEs' investments, which would improve the efficiency of capital. Also, it helps improve the overall allocation of public resources.

This is a good time to introduce an SOE dividend policy. High investment growth is a key concern for the authorities, and reducing retained earnings of SOEs by paying out dividends would reduce financing available for investment. With the receipts, the government can finance the social spending needed to build a harmonious society, or any other goal it sees fit. Whether the dividends will be enough to cover all additional spending remains to be seen, but dividends will certainly help. Of course, for dividends to pay for social spending, they should be paid into the budget, not into any extra-budgetary fund.

Bert Hofman, Louis Kuijs, and Chunlin Zhang, World Bank, Beijing

(China Daily 09/13/2006 page4)