Forget about trying to outguess the People’s Bank of China on interest rate increases. On the fundamentals, China’s stocks got more expensive and less attractive for 2011 because of two end-of-the year announcements from the government in Beijing.
Each announcement signals reduced profitability for China’s big export companies.
First, cities around China announced another round of increases to the minimum wage. Beijing, for example, said it would raise its minimum wage by 21% effective January 1. The move takes the monthly minimum wage to $175 and follows a 20% increase in the minimum wage in June.
Beijing isn’t performing a solo act either. Every province and city in China has announced an increase in the minimum wage of 12% to 21%. (Think this might have some effect on inflation already running at a 5.1% annual rate in November? It sure will speed up the current move by Chinese companies from higher minimum wage coastal provinces to lower minimum wage inland areas.)
Second, the government has decided to raise the dividends that it requires China’s state-owned companies to pay the national government. The increases vary from industry to industry. For example, the country’s biggest chemical, oil, tobacco, telecom, and power-generating companies, a group that includes Petrochina, China Mobile, China Telecom, and Sinopec, will see their dividend payouts to the government increase to 15% of their post-tax profits from the current 10%. Another group of construction, steel, mining, and transportation companies, including Baosteel, Air China, and Chinalco, will see dividends climb to 10% of post-tax profits from a current 5%. A third group of research institutes and military equipment makers will pay the government a dividend for the first time of 5%.
According to the State-owned Assets Supervision and Administration Commission, China’s 122 largest state-owned companies are projected to show profits of $151 billion in 2010.
The increase in dividends continues a process that began in 2007 when state-owned companies were required to pay dividends to the Chinese government for the first time. That move punctuated a decade of restructuring that saw state-owned companies fire tens of millions of workers, close company-operated and -funded hospitals and schools, and produce a five-fold increase in net profits from 2005-2010 for the 122 largest state-owned enterprises.
Economists speculate that the increase in dividends is intended to serve two goals. First, it will reduce the capital available for expanding capacity in industries already suffering from over-capacity. Second, it will give the central government more money to use to increase spending on social services from health care to education to retirement pensions as Beijing tries to rebalance its economy toward greater domestic consumption.
For investors, though, the dividend increase—added to the increase in the minimum wage–means lower earnings to support current stock prices for China’s big state-owned industrial export companies.
And it raises the question, If Beijing is rebalancing China’s economy toward more domestic consumption, shouldn’t investors be doing the same with their portfolios of Chinese stocks?