(Reuters) - Chinese firms are attracting investors with increased dividends and buybacks, spurred by a policy push for corporate governance reforms in a bleak and uncertain economic environment.
Beijing's encouragement of these reforms alongside directives to pension funds and mutual funds to increase investments in domestic stocks are also forcing corporations to distribute dividends and deliver stable returns to institutional investors, aligning their efforts with government objectives.
According to LSEG data, the dividend yield of Chinese companies stood at 2.8% at the end of 2024, the highest in eight years.
Data showed total cash dividends of over 2,000 large and mid-cap firms rose to a record high of 3.4 trillion yuan ($468.84 billion) in 2023. Their dividends are expected to have risen by 1.2% in 2024 and could rise a further 8.6% in 2025, according to LSEG SmartEstimates.
Share buybacks by China's A-share listed companies reached a record high in the first eight months of 2024, with approximately 1,900 companies buying back shares worth over 130 billion yuan marking historical highs, according to data from the China Securities Regulatory Commission.
Such reforms in China, similar to corporate governance changes in countries such as Japan and South Korea, are increasing the appeal of dividend funds that invest in companies with high payouts.
According to LSEG Lipper data, Chinese dividend funds have seen inflows of about $8 billion since 2020, compared with a total inflow of just $273 million in the previous five years.
Last year, Huatai-PineBridge CSI Dividend Low Vol Idx ETF, Wanjia CSI Dividend Index ETF and Harvest CSI 300 Dividend Low Volatility Idx ETF received the highest inflows into Chinese dividend funds at $678.7 million, $598.5 million and $366.9 million, respectively.
China's dividend payout ratio stood at 52% at the end of last year, higher than South Korea's 27.6% and Japan's 36.1%.
Valuations for Chinese stocks remain below their historical average, which means investors need to be careful about picking the right stocks that generate returns, besides being cheap. Compared to other major markets, Chinese stocks trade at roughly 13 times forward earnings while Japan's Nikkei trades 15 times and the S&P 500 nearly 25 times. There are over 40 companies in China whose price-to-earnings (P/E) ratio is below their dividend yield making them extremely attractive, according to Julius Baer (SIX:BAER). "On a valuation basis, China is really cheap," said Vis Nayar, chief investment officer at Eastspring Investments. "We think that in this need to diversify, being active investors will make a world of difference."
($1 = 7.2520 Chinese yuan renminbi)