China’s banks pay out massive dividends relative to their internal capital generation capacity. This is a recipe for capital destruction. The heads of China’s largest state-owned enterprises (SOEs) tend to have a ministerial ranking, equal to a State Council member or provincial governor, but the heads of China’s largest banks are ranked a notch lower. Central Huijin, a division of China’s sovereign wealth fund, has a majority ownership stake in China’s largest banks and can control them directly through the board room, whereas the other SOEs report to an organization that is technically not even part of the government. It is hardly surprising therefore that while most SOEs pay miniscule dividends, state-owned banks routinely pay out 50% of profits in dividends. Resource companies, the SOE sector with the next highest required payout ratio, only pay 10% and many SOEs do not pay any dividends; meanwhile, they receive subsidized capital from the banks.

Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients: China’s Banking Sector: The Big Payback