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Real value of stocks

(China Daily)
Updated: 2008-08-25 07:40

The announcement by China's securities watchdog for raising the refinancing threshold for listed companies is more than welcome. By urging them to pay more dividends to shareholders, the move will help make listed companies more accountable and their stocks more attractive to Chinese investors.

Last Friday, the China Securities Regulatory Commission said in a new administrative rule that for those listed companies scheduled to refinance on the market, the dividend they paid to shareholders in the recent three years should be no less than 30 percent of its distributed profits. The previous baseline was 20 percent.

For Chinese investors who have been hit hard by a 60-percent dive of the domestic stock market from its peak last October, the new rule may offer little immediate relief. Many of them had pinned high hopes on an Olympic rally to cut their losses. But the market disappointed their expectations in spite of the great joy the Beijing Olympic Games inspired across the country.

It may be a pity that Chinese investors cannot enjoy double happiness from both super performances of all athletes, especially those from China, and an anticipated rebound of Chinese shares.

Yet, for the long-term healthy development of China's capital market, the caution that the securities watchdog exercised against short-term stimulus is much needed. Stopgap measures can prop up the market for the moment but often prove futile in the long run.

Better than simply refraining from administrative intervention to hike share prices, the securities authorities may now take action to fix long-term problems that have long choked the healthy development of China's stock market.

One of the root causes why many Chinese investors have paid little attention to the fundamentals of listed companies but engaged in short-term stock transactions is that they can get little dividend from the shares they hold. While public companies in developed countries pay as much as 50 percent of their profits to shareholders as dividends, domestically listed companies are usually reluctant to reward their shareholders with cash or stocks. After rapid rises in the past three years, the proportion of profits domestically listed companies paid as dividends to shareholders reached only 29 percent in 2007.

The new rule that makes more dividends a precondition for refinancing will obviously improve the long-term investment environment. It will stop listed companies from raising funds insatiably from the market while not properly rewarding shareholders.

To speed up the change that makes listed companies more accountable for shareholders and increase the underlying value of Chinese shares, the securities watchdog should not only lay down a bottom line on dividend-paying but also come up with detailed incentives to encourage listed companies that excel in rewarding their shareholders.

(China Daily 08/25/2008 page7)