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Sun. Jul 14th, 2024

Chinese companies are rushing to increase dividends and buy back Japanese-style shares

By Vaseline May30,2024

By Samuel Shen and Summer Zhen

SHANGHAI/HONG KONG (Reuters) – Chinese listed companies are rushing to buy back shares and lift dividends as they respond to calls from regulators that mirror reform efforts in Japan and South Korea, sparking a welcome rally even as investors doubt that broader governance changes are needed on foot.

China-listed companies have announced record cash dividends totaling 2.2 trillion yuan ($300 billion) for 2023, despite a decline in combined profits, official data showed. More than a hundred listed companies returned money to investors for the first time.

Meanwhile, a growing number of companies are unveiling share buyback programs to avoid delistings or other sanctions under stricter regulations.

China’s measures, aimed at improving returns for investors and announced in March, have sparked a solid recovery in stocks, with the benchmark CSI300 index up almost 17% from February’s five-year low.

They have also drawn comparisons to the Tokyo Stock Exchange’s drive for capital efficiency, which drove the Nikkei to record highs.

But a Japanese-style rally is unlikely as China’s reforms face skepticism from fund managers who say it is more about saving the market than improving corporate governance.

State-controlled companies, which account for about 30% of the market capitalization in China and Hong Kong, are under the firm grip of China’s ruling Communist Party, which could raise conflicts of interest with non-state shareholders.

In Japan, companies have begun to reduce their strategic shareholdings as part of ongoing reforms to become more market-oriented.

The cash return has struck a chord with investors who are “calling for huge dividends and more buybacks,” said Yang Tingwu, fund manager at Tongheng Investment.

“However, Chinese companies still have a long way to go in corporate governance,” he added. Under Chinese regulator Wu Qing, listed companies are being pressured to engage more with investors and improve returns.

This mimics Japan’s corporate reforms and South Korea’s “Value Up” program, says John Pinkel, partner at New York-based hedge fund Indus Capital, which recently increased exposure to China.

“The common denominator of these positions: they all have large cash positions, are buying back shares or increasing dividends, and we like their business models.”

PAYOUT

The Chinese campaign has left many companies scrambling to pay dividends.

Jason Hsu, chairman and chief investment officer of Rayliant Global Advisors, said Japanese companies are responding well to sticks and the same strategy is working in China, where regulators hope to protect retail investors.

For example, Jilin Expressway Co and Fangda Special Steel Technlogy did not plan to pay dividends but changed their plans to return money to investors after questioning by the Shanghai Stock Exchange.

In addition, companies including Chongqing DIMA Industry Co, SafBon Water Service and Infund Holding Co sought to unveil share buyback plans, following warnings from stock exchanges that they could be delisted if their share prices remained at persistently low levels are traded.

To be fair, concerns remain particularly concerning state-owned enterprises, which bear social responsibilities that often conflict with shareholder interests.

And while the revival of Japan’s stock markets has been aided by foreign inflows, China still faces geopolitical headwinds and global fund managers remain nervous.

“When it comes to Chinese companies, as a Western minority investor you are not at the top of the priority,” said Sunil Krishnan, head of multi-asset funds at Aviva Investors, London.

“That is just a structural factor that Western investors must recognize and accept.” Still, as markets priced in progress, investors have pocketed profits.

“The way I look at Chinese governance is that there is indeed a long way for the Chinese to improve and they are trying to improve,” said Chi Lo, senior market strategist at BNP Paribas Asset Management.

(Reporting by Samuel Shen and Summer Zhen; Editing by Tom Westbrook and Shri Navaratnam)

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