CHINA'S government plans to start collecting dividends from state firms for the first time next year, answering calls to better allocate the nation's capital and curb an overheating economy, according to a top regulator.

The dividends will be used to fund public works projects and support the development of select industries, Li Rongrong, director of the State-owned Assets Supervision and Administration Commission, told reporters in Singapore recently.

"Chinese government-held companies have not paid any dividends in the past because they have had (financial) difficulties, which means we had to allow them to keep their profits for their own development," Li said. But "dividends should be required from the start of next year."

China's economy gained 11.3 percent in the second quarter, the fastest growth in a decade, spurred by a nearly 30 percent increase in fixed-asset investment and a widening trade surplus.

The central government has raised benchmark interest rates twice since April and ordered commercial banks to rein in credit to real estate, cement and other overheated industries.

International economists including some at the World Bank have suggested that China demand dividends from its state firms in a bid to divert excess capital available for investment.

The World Bank has argued that Chinese state-owned firms, with no need for dividend payouts, usually reinvest their profit inefficiently, leading to greater risks of inflation.

The 166 state companies under direct control of the assets commission logged a combined profit of 351.2 billion yuan (US$44.2 billion) in the first half of the year, up 16 percent from a year before.

The commission is working with the Ministry of Finance to produce detailed rules on dividend payouts, including determining the amount to be paid to the government and how it will be used, according to Li.

Li also noted that financial institutions and other state companies that have received capital infusions from the central bank's Central Huijin Investment Corp must also pay dividends.

Central Huijin has poured a combined US$60 billion into the country's top three lenders - the Industrial & Commercial Bank of China, Bank of China and China Construction Bank - to help them restructure and list shares.

The assets commission is also drafting plans to allow state-owned companies under its control to offer incentives such as stock options to their employees to enhance performance in a more market-orientated way, Li said.

Editor: Yan