China's listed companies stingy with interim dividends

The stock dividend policy at most Chinese companies shows little correlation to fundamentals.

Just 1.96%, or 14, of the listed companies in China that announced interim results last week have announced dividends. At the same time last year, 3.4% companies had announced a dividends, and a full 60% had by the end of the year. Stock is the favourite form of dividends in China, since it is not taxed like cash dividends.

But one trader said that the real importance of dividends lay in the fact "that they were one of the many instruments players use to manipulate the markets."

The CSRC, which held a securities 'summit' last week has been roundly criticized by market participants for depressing the market through its reform process. But a look at the dividend policy in China implies they have not gone far enough.

One reason for the low dividend is that it can cost up to RMB40,000 to carry out, as well as many hours of form filling, since there are many types of protection set up by the government to prevent the disposal of state assets.

Still, dividends have been surprisingly stingy this year, and observers are trying to come up with explanations.

One reason could be that many companies issued a large amount of stock dividends at the end of last year, but without being able to slow the downward momentum of their share price.

"Many companies issued the stock dividend in the hope it would help their share price, but the market, rather unusually, didn't pay much attention," says one trader.

That could be because investor interest has declined on the back of China's stock market slide since its high in June 2001 at 2200 points. It has been hurt especially by the prospect of a state share sell off and sentiment has turned negative, with the Shanghai composite index recently dropping through the 1500 barrier. In addition, most listed companies are state owned enterprises with a very limited ability to manage capital and other resources profitably.

Still, the dividend policy is not really linked to fundamentals of that sort, but more as part of the game manipulators play.The announcement of a big stock dividend, for example, seems to have the psychological impact on inexperienced investors.

"It's psychological. Unsophisticated punters think that three shares priced at one dollar each are more worth buying than one share priced at three dollars," says a fund manager, adding that the aim is above all to bring in new buyers.

As punters flock to the seemingly cheap counter, the price is pushed up, enabling the main owners of the dividend stock, the largest shareholders to cash out of their bonus shares at a profit.

"It's just a game. It has nothing to do with fundamentals. But companies that announce large stock dividends tend to see their share prices rewarded, irrespective of their true earnings situation," comments one player.

That's because the larger the stock dividend, the lower the price is forced down, the stronger the psychological effect on investors thinking they are getting something cheap, and the higher the momentum price rebound.

One corollary of this game is that it is the worst companies that issue the biggest stock dividends since they have few other resources with which to boost their share price.

One report lends credence to this theory by pointing out that half the companies that have announced stock dividends are very highly concentrated, with each shareholder holding at least 5000 shares, such as Hejin Investment and the Ruyi Group. It's these companies, whose shareholders hold so much stock that they don't mind dilutions and who have authority over the company, who can be the prime beneficiaries of the dividend policy manipulation.

The remaining stock dividend paying companies are those that are under pressure to repay their investors after losing money for them - for example, Shenhuo which did a 10 for three rights issue last year priced at RMB13.6, but whose share price is now under RMB11. That left one of the chief buyers of the rights issues, Huatai Securities, with a lot of shares on its hands - which it was reluctant to sell to avoid recognizing a loss. But it could partly recoup those losses if the large stock dividend announcement encourages punters to push the price back up, however briefly.

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