Last updated: January 8, 2013 7:28 pm

Shanghai exchange urges dividend reform

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Companies listed on the Shanghai Stock Exchange have been told by the bourse to return 30 per cent of profits to shareholders via dividends in the latest move by authorities to bolster confidence in China’s equity markets.

Dividend payments by Chinese companies have been rising steadily in recent years, reaching about 30 per cent of aggregate profits for all listed companies in 2011, according to a statement from the exchange published on Monday.

“However, it must also be recognised that there is still a definite gap between cash dividend ratios for Shanghai-listed companies and those in mature markets, and high dividend ratios are largely concentrated in a minority of blue-chip stocks such as banks,” said the exchange.

It expects companies to adhere to the guidelines when released their full year 2012 annual reports.

Under the new exchange guidelines, those who regularly make dividend payments and “satisfy” investors will be placed in a “green light channel” for any financing and mergers and acquisition activity that relates to the exchange’s supervision. Companies that do not meet the 30 per cent threshold for dividend payouts were told that they should provide a full explanation in their annual reports.

“This is not a strict regulation per se because it is proposed by the Shanghai stock exchange, more of a hard recommendation”, said Agnes Deng, head of China equities at Baring Asset Management.

The exchange said it expects companies to adhere to the guidelines when released their full-year 2012 annual reports.

In the US for the third-quarter, the percentage of earnings paid out in dividends for the S&P 500 companies was 29.1 per cent, according to Factset data. However, US companies also return large amounts of capital to shareholders through share buybacks.

Based on 2011 earnings, the average dividend yield for members of the Shanghai Composite index was 2.2 per cent, compared with 3 per cent for companies in the MSCI Asia ex-Japan index, according to Bloomberg data.

The China Securities Regulatory Commission, the mainland market regulator has taken a number of steps in the past year to reform the equity market and bring more both foreign and domestic institutional funds into a market seen as still largely retail driven.

Last June, rules for foreign investors seeking a licence to trade Chinese shares were relaxed, a move followed by a global roadshow to attract foreign funds, and a cut to the tax rate on dividends for equity investments held for more than a year.

“The regulators have been consistent in saying that the ratio of institutional investors in the equities market is not high enough,” said Robert Zhang, head of research at CEBM, an advisory firm. “For this to happen, companies need to give investors a reasonable return.”

In late December, the CSRC made it easier for mainland companies to list overseas, a move designed to ease some of the pressure on the Shanghai market caused by a backlog of more than 800 companies looking to list.

Until last month, investors in Chinese shares had endured three years of consistently poor performance. On November 27, the benchmark Shanghai index dropped below 2,000 points for the first time since the depths of the financial crisis.

However, Chinese stocks have since rallied sharply, with the CSI 300 – an index comprising Shanghai and Shenzhen-listed companies – rising 20 per cent since the start of December. Foreign investors have also put record amounts into China managed funds and exchange traded funds in recent weeks.

The Shanghai market closed down 0.4 per cent on Tuesday at 2,276.07.

Additional reporting by Arash Massoudi in New York

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