Higher SOE dividend indicates policy tilt towards growth

    Moody's Investors Service said in a new report that increased dividend collections from state-owned enterprises (SOEs) in China (A1 stable) will partially offset the revenue decrease for regional and local governments (RLGs) from recent tax cuts, and indicate that authorities are prioritizing growth over deleveraging.
  "The rise in dividend collections coincided with a sharp decline in general budgetary revenue growth for Chinese RLGs in 1H 2019 while operating expenditures continued to grow at a robust 10.8% during the period," said Yubin Fu, a Moody's Assistant Vice President and Analyst.
  "As such, higher central government transfers to RLGs stemming from increased SOE dividend collections have played a significant role in maintaining revenue growth and partially offsetting the impact of tax and fee reductions, and we expect this to continue in the second half of the year," added Fu.
  Moody's views the SOE dividend policy -- first announced in March -- as part of the central government's efforts to address RLG funding gaps and spur economic growth, with other measures including increased RLG bond quotas, allowing the use of special-purpose bonds for project capital, and changing land supply policies.
  At the same time, the new policy could result in lower growth in retained earnings for some SOEs. A slower rate of retained earnings growth would offset other factors that stabilize or lower SOE leverage, although Moody's expects any impact from the higher dividend transfers on leverage will be small.
  The higher dividend transfers to RLGs also underscore the interconnectedness between the central government, SOEs and RLGs.
  Moody's ongoing research on this topic aims to provide insight into the uniquely integrated nature of China's institutional framework, economy and financial system, which acts both as a powerful instrument of credit risk mitigation and a potential conduit for the transmission of financial shocks.