Moves by CSRC fail to give lift to equities

China's securities regulator has asked listed companies to improve their dividend policies to provide higher payouts to shareholders, the China Securities Journal reported on Thursday. The China Securities Regulatory Commission (CSRC) also said it will make initial public offerings (IPOs) and refinancing transactions more transparent to protect investors, the newspaper said. The announcements came with the benchmark stock index down nearly 12 percent year-to-date. However, the moves didn't help the market gain any traction on Thursday. The Shanghai Composite Index fell 1.8 percent, to 2479.54, its biggest loss in three weeks. Shares were undercut by news that China's exports had grown at the slowest pace in nearly two years in October and concern that Europe's debt crisis was deepening even further as Italian bond yields surged. The CSRC report "is definitely good news, but what the CSRC announced is too vague. It said what to do but didn't say what will happen if companies didn't comply", said Wang Jianhui, chief economist with Southwest Securities Co. "So the news didn't have much short-term impact on the stock market." The CSRC said companies should disclose in their prospectus detailed dividend policies and profit-sharing plans, which should not be changed arbitrarily, according to the newspaper. The commission also said that it was researching tax policies that would lead to higher dividends. Chinese investors now face a 10 percent tax on dividends. "Dividends are the most important component of investor returns" and key to sound capital market functioning, the newspaper said, quoting a CSRC official. Chinese-listed companies pay much lower dividends than their foreign counterparts. In 2010, 61 percent of the companies listed on the A-share market paid dividends. They paid a total of about 501 billion yuan ($78.79 billion), averaging 0.13 yuan a share. In the same year, dividends paid by major State-owned companies, which accounted for more than one-third of the A-share market's capitalization, amounted to only 5 percent of profits. The average payout ratio is about 30 to 40 percent in developed markets, including the United States. "The reason that Chinese companies pay much lower dividends is that their internal incentive system is different from foreign companies," said Wang. He said that listed companies in other countries motivate managers through stock options, giving them an incentive to maximize stock prices, which isn't the case in China. The CSRC said it is also working on rules to improve disclosure, as a major way to regulate IPOs and refinancing activities and improve the quality of listed companies. China's equity markets haven't moved in tandem with the broader economy, often posting major declines despite robust GDP growth. The reason is that listed companies don't reflect the broader economy, said Pan Yingli, a finance professor at Shanghai Jiao Tong University. "The companies that went public are the good ones. Measures should be taken to improve the quality of listed companies," she said.