CHINESE companies trading on the Shanghai Stock Exchange will be encouraged to pay at least 30 per cent of their annual profits to shareholders as the bourse seeks to lure more investors to equities.

Companies that fail to do so will need to disclose the reason in annual reports, the Shanghai exchange, the nation’s main bourse, said in a dividend-payment guideline on its website Monday last. There was no mention of penalties in the statement.

“This is the first time the Shanghai exchange has issued such a guideline on dividend payments,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “This makes dividend payments for companies more implementable and is positive for the market.”

Guo Shuqing, chairman of the China Securities Regulatory Commission, has encouraged dividend payments, tightened rules on delisting companies and cut trading costs to boost the appeal of Asia’s third-largest stock market. The CSI 300 Index of the 300 biggest companies on the Shanghai and Shenzhen stock exchanges entered a bull market Monday last after rallying 20 per cent from last year’s low on signs economic growth is picking up.

“Only the establishment of an efficient and stable dividend-payment mechanism for listed companies can attract long-term institutional investors seeking steady dividend returns and reasonable capital gains,” the exchange said in the statement. “That’ll make the valuations of the market reasonable and stable.”

Dividend tax: The average dividend yield of the 994 companies in Shanghai Composite Index is 2.5 per cent, compared with 2.7 for the MSCI Emerging-Markets Index. The Shanghai index lost 0.4 per cent to 2,276.07 at the close. The measure rebounded 17 per cent through from an almost four-year low set on December 3.

The Shanghai index trades at 12.6 times reported earnings, compared with a record low of 10.8 in December, according to daily data compiled by Bloomberg since 2006.

As of the end of 2011, 347 companies in the Shanghai exchange paid dividends for three consecutive years, accounting for 40 per cent of the companies that have gone public for at least three years, the Shanghai exchange said in the statement.

China announced last year it would cut the stock dividend tax by half for individuals who hold shares for at least one year to encourage long-term investment.

The tax rate would be lowered to five per cent starting this year, the ministry of finance said in November. The rate was doubled to 20 per cent for those who hold shares for one month or less and kept unchanged at 10 per cent for those who held equities between one month to one year.

—Washington Post/Bloomberg