The central government plans to use dividends from some state-owned firms to bolster social security funds when necessary. The plan will go into effect this year on a trial basis.

It's part of the government's program to start collecting dividends from all state firms under its direct control next year to better allocate the nation's capital to avoid unwanted investment.

The program will be piloted first within selected central government-controlled enterprises this year, the State Council, or China's Cabinet, said in a statement late yesterday, without naming any of the companies involved.

The dividends will be collected jointly by the Ministry of Finance and the State-owned Assets Supervision and Administration Commission, the statement said.

The statement didn't specify what proportion of profit each state-owned enterprise must pay the central government. The dividends will re-allocated to support the nation's strategic planning and can be used to bolster social security funds when necessary, it said.

China's central government halted collecting dividends from state-owned enterprises in 1994 as part of efforts to help financially-troubled firms use profits for their own development.

The central government began to consider a plan in 2006 to resume demanding dividends from state firms, which have been posting strong earnings in the recent years on the back of fast economic growth.

International economists including some at the World Bank have suggested that dividends should be collected from Chinese state enterprises in a bid to divert excess capital available for investment.

The World Bank has argued that Chinese state-owned firms, with no need for dividend payouts, usually reinvest their profit inefficiently, leading to greater risks of inflation.

The 159 state companies under direct control of the central government logged a combined profit of 754.7 billion yuan (US$100.4 billion) in 2006, up 18.2 percent from a year before.

Li Rongrong, director of the state-asset regulator, said last year that the dividends from the state companies will likely be used to fund public works projects and support the development of select industries.

Li also noted that the profits can help wrap up reorganizations of some state-owned companies and will likely be invested in research and development.

(Shanghai Daily September 14, 2007)