“China is a sleeping giant. Let her sleep, for when she wakes, she will shake the world” – or so goes the famous quote, often attributed to Napoleon Bonaparte. During the last decades, we have indeed witnessed a meteoric rise of the Chinese dragon – with substantial ramifications on the geopolitical, economic, and military fronts. Chinese GDP has soared, but did that translate into economic value creation by Chinese firms? Are they catching up to their US counterparts? And in which sectors have Chinese firms created more value?
Traditional macroeconomic metrics (like GNP and GDP) are not ideally suited for answering these questions because the direct link to corporate performance gets largely lost in national income accounting. Common financial metrics (like accounting profits and free cash flow) can also be misleading, as they penalize firms that choose to make R&D outlays while ignoring the opportunity costs of capital.
The economic profit estimates, however – which the Crux of Capitalism project derives for over 39,000 publicly-listed firms around the world since 2005 – provide insightful bottom-up information that is ideally suited for studying the developments in the Chinese corporate sector. Here we summarise four of the findings from our economic profit calculations.
First, our analysis reveals that the Chinese corporate dragon has indeed awoken, but only recently. Taken together, Chinese firms created little value before 2019. The economic profits generated by publicly listed Chinese firms rose from just $26bn in 2019 to almost $249bn in 2022. If we adjust these values to take non-listed firms into account, the rise from $53bn in 2019 to $620bn is even more impressive. As far as a comparison to the US is concerned, however, the Chinese corporate dragon still has a long way to go. In 2022, Chinese firms created about 34% of the total economic profits generated by their US counterparts. By contrast, China’s GDP was 70% of that of the United States in 2022.
Second, our economic profits data highlight that not all publicly listed Chinese companies seem to have contributed to this recent boom in value creation. More than four in 10 firms “destroyed” value in 2022. The share of very strong firms creating more than $100m in annual economic profits, however, is significantly larger than the share of large value destroyers with economic losses of $100m or more (11% vs. 3%).
“About half of China’s economic profits are currently generated in the industrial, IT, and consumer discretionary sectors.”
A look at the developments this century reveals that the Chinese corporate sector appears to be very vulnerable during periods of macroeconomic turmoil. During the instability witnessed during 2015-2016, for example, the share of firms with negative economic profits rose to a staggering 64%. This apparent fragility is a concern as China’s current deflation challenge is likely to push up real funding costs.
Third, China’s corporate value creation is mostly driven by a rather small group of particularly successful ‘superstar’ firms. Almost three-quarters of all positive economic profits are generated by just 5% of companies. The top 10% and 25% of publicly listed firms create a stunning 84% and 96% of all profits respectively. These percentages were rather stable throughout the past 18 years, except for 2015-16 when the top value creators seem to have translated their relative resilience into a larger profit share.
Fourth, about half of China’s economic profits are currently generated in the industrial, IT, and consumer discretionary sectors. While the consumer discretionary sector has proven to be a rather reliable and consistent value creator over the years, results in the industrial sector have been very volatile.
The growing contribution of the research-intensive IT sector is particularly striking. Starting with a contribution to total Chinese economic profits of only 2% between 2005 and 2013, the sector accounted for almost 25% of profits during the second half of our sample. Based on such findings, the Chinese dragon seems to be increasingly successful in turning itself into a profitable, global innovation leader. At the other end of the spectrum, the utilities sector has been a very weak value generator since 2005, while the energy sector has seen massive swings in positive and negative directions.
In sum, only in the past few years has China’s growing economic footprint translated into its firms making significant economic profits. Whether that performance can be sustained remains to be seen, not least given repeated reports this year about headwinds facing the Chinese economy.
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