In fact, losses in oil refinery business didn't affect Sinopec's overall profits due to its huge profitability potential in crude oil exploration. Statistics from Sinopec show it still achieved a profit growth of 30 percent in 2006, bringing its total profits to 53.91 billion yuan, despite a loss of 25.3 billion yuan in the oil refinery business.

At the same time, huge profits remain within these monopoly sectors, enlarging the rich-poor divide in China. Bu Zhengfa, Vice Minister of Labor and Social Security, disclosed in May 2006 that the average salary for employees in monopoly sectors including electricity, telecommunications, finance, insurance and tobacco is two or three times that of employees in other sectors. The gap is likely even wider due to unreported "gray" income and generous welfare benefits employees in these sectors receive.

Blind investment and expansion

"Aside from these unfair allocations, another direct problem of the large profits resting in the hands of SOEs is blind investment," said Luo Jiangang, a researcher with the Ministry of Finance.

SOEs usually face a hotbed of risks as they have never worried about investments and have less pressure for financing compared to other enterprises in China, according to Yin Zhongyu, Executive Director of the Shanghai Longrange M&A Consulting Co. Ltd.

"International convention tells us that a large-scale merger and acquisition project usually takes one to three years to complete, with the investigation stage alone taking at least half a year," said Yin. "Some central SOEs expanded rapidly by frequent M&A moves in quite short periods. The mounting risks behind this irrational practice have given rise to public misgivings. "

China National Chemical Corp. (ChemChina) is a typical example. The corporation snowballed through acquisition of over 20 domestic companies in two years. Yet, size is not everything. They ended up lapsing into a situation that didn't match their acquisition goals.

Yin cited the case of acquiring Qingdao Yellow Sea Rubber Group for example.

"Qingdao Yellow Sea Rubber Group, with heavy debts, possessed zero net assets though boasting total assets of 6.5 billion yuan, while its major acquirer, China Vehicle Group as a part of ChemChina, had only 3.5 billion yuan of total assets and 900 million yuan of net assets," said Yin. "It was a case of a pony pulling a large cart, jeopardizing the accounting liquidity".

"Currently, profits of SOEs are soaring, average salaries in monopoly sectors are growing, and centrally controlled SOEs spend blindly," said Liu. "All these factors have impaired the state's efforts to prevent economic overheating. Appropriate SOE dividend collection will help to ease the pressure."

He also pointed out that the absence of an operating budget system of state capital accounted for the situation that allowed failing enterprises no exit, and made it difficult for the government to protect SOEs it intended to support. After the new system is established, unused resources will be transferred to other enterprises, optimizing the structure of the state-owned economy and enhancing the competitiveness of SOEs.

Public benefits

When the dividend collection plan is in place, the total net profits of SOEs should top 1 trillion yuan this year if centrally controlled SOEs were to achieve a total after-tax profit of more than 700 billion yuan in 2007, coupled with the 300 billion yuan in net profits of SOEs owned by local governments. Based on these predictions, "it is no problem for the state to get 70 billion yuan in dividends," if the state collects an average of 10 percent of all net profits, estimated Cheng Wei, Secretary of Macro-Strategy of the SASAC Research Center.

Then the question follows: How to better use the fattened dividends? Some analysts think they should be used to improve education and medicare conditions. Others believe the government should learn from developed countries to establish special per-capita energy and transport allowances.

Li Rongrong with the SASAC expressed the opinion that dividends should be used for the reform and restructuring of SOEs in the first two years and later to address the weak points of these enterprises such as the R&D ability.

Li Shuguang, professor with China University of Politics and Law, agreed with Li Rongrong and said, "The SOE dividends should be used to pay the reform costs of SOEs, reinvest in them and improve the social security system as a whole."

The utmost advantage of an operating budget system of state capital, in the eyes of Louis Kuijs, William Mako and Zhang Chunlin, economists from the World Bank China Office, would be to increase the state's income and the amount of spending in the public budget. They estimated the state could increase spending on education and medicare by 80 percent if they collect 50 percent of SOE net profits as dividends and invest all the money into the two fields.

This view is echoed by many Chinese scholars. Song Guoqing, professor with the China Center for Economics Research at Peking University, said the most important is to ensure that the money goes to individuals through tax deductions and other measures.