China's government will next year start extracting more money in dividends from the companies it controls, in a long-awaited step that could help level the playing field between private firms and the nation's massive state-owned enterprises.

In a decision made with little fanfare, China's State Council, the country's equivalent of a cabinet, said hundreds more state-owned companies will have to pay a higher level of dividends from 2011.

The move strengthens an existing trial program, widely criticized as ineffective, under which about 130 large companies—including China National Petroleum Corp., State Grid Corp. and China Mobile Communications Corp.—pay 5% or 10% of their annual profits to their government shareholder.

Behind that decision lies a long-running and increasingly intense debate over the role of state-owned companies in today's market-driven China. Some Chinese see a strong state sector as key to the nation's economic resilience during the financial crisis and its rising global prominence. Others see powerful state companies, flush with cash from the government's stimulus program, as a growing threat to the smaller private businesses that create most new jobs.

"If state enterprises don't pay dividends, it amounts to unfair competition for the private sector. It allows state enterprises to pay higher salaries, to continue to invest and reinforce their position in the market," said Tang Min, secretary-general of the China Development Research Foundation in Beijing. "This is a good decision and a fair decision."

The move to boost dividends is the latest in a series of policy changes that have been rolled out since a mid-October meeting at which top Communist Party leaders agreed on a set of priorities for the coming five years. Officials have talked less about driving heavy industry and exports, and more about raising household incomes and reducing inequality.

"The twelfth five-year plan is more focused on fairness. There are some pretty strong opinions about state enterprises in society right now," said Ji Zhu, a professor of economics at Beijing Technology and Business University.

While full details of the next five-year plan will not be announced until next year, recent moves have offered an early preview. Government agencies raised benchmark interest rates as well as retail prices for gasoline and other fuels, in moves that were considered long-overdue responses to market pressures. And in a step toward financial-market liberalization, China has launched its first credit derivatives.

The International Monetary Fund and World Bank, among others, have long urged China to overhaul how it handles state firms' finances. Taking more money from cash-rich companies and spending it instead on such tasks as improving health care would help lower China's astronomical savings rate and reduce its trade surplus, economists say. The existing dividend program—which brought in 157.22 billion yuan ($23.61 billion) from 2007 to 2009, or less than 1% of government revenue—doesn't seem to have been big enough to have that effect.

Under the changes approved at a State Council meeting last week, an additional 1,631 companies controlled by central government departments and conglomerates will join the dividend program next year. And the proportion of profits companies pay out in dividends will be "appropriately" increased, while taking into account their financial situation, the State Council said in a statement. It didn't give more details, and the government agencies responsible for the program said Monday they couldn't comment further.

According to a World Bank research report, state-owned enterprises in other countries pay an average of 33% of profits as dividends to their government owners. In China, only a small group of the country's biggest companies are required to pay the maximum 10% dividend. Around 100 companies pay 5% of profits, and the rest pay nothing at all.

China's caution in asking more of its companies reflects in part the checkered history of state enterprises: In the 1990s, when most such firms were losing money and shedding workers, the government stopped asking for dividend payments.

But after slimming down and restructuring—there are now around 110,000 state companies nationwide, half the number of a decade ago—profits are on the rise again. State companies dominate lucrative parts of the economy, such as oil, cigarettes and telecommunications, and have been expanding into new areas like real estate.