Competitiveness
by Camilla Erencin, Simon J. Evenett, Alexander Gruber, Felix Reitz Published 6 February 2024 in Competitiveness • 4 min read
We examine whether China’s tremendous economic growth this century is reflected in significant economic profitmaking by its firms.
“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.
Chinese firms lagged China’s boom
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.
Chinese corporate sector vulnerable to macroeconomic turmoil
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.
Superstar firms drive corporate value creation
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.
Industrial, IT, and consumer discretionary sectors dominate profits
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.
Authors
Camilla Erencin
Ph.D. candidate in Economics at the University of St.Gallen
Camilla Erencin is a Ph.D. candidate in Economics at the University of St.Gallen and holds a M.Sc. in economics from the University of Warwick. Her research focuses on corporate performance and competitive strategy under uncertainty.
Simon J. Evenett
Professor of Geopolitics and Strategy at IMD
Simon J. Evenett is Professor of Geopolitics and Strategy at IMD and a leading expert on trade, investment, and global business dynamics. With nearly 30 years of experience, he has advised executives and guided students in navigating significant shifts in the global economy. In 2023, he was appointed Co-Chair of the World Economic Forum’s Global Future Council on Trade and Investment.
Evenett founded the St Gallen Endowment for Prosperity Through Trade, which oversees key initiatives like the Global Trade Alert and Digital Policy Alert. His research focuses on trade policy, geopolitical rivalry, and industrial policy, with over 250 publications. He has held academic positions at the University of St. Gallen, Oxford University, and Johns Hopkins University.
Alexander Gruber
Research fellow and lecturer in economics at the University of St.Gallen
Alexander Gruber is a research fellow and a lecturer in economics at the University of St.Gallen. Alexander completed his Ph.D. studies in economics and finance at the University of St.Gallen and at Stanford University. His research focuses on international macroeconomics, banking, and financial stability.
Felix Reitz
PhD candidate in international affairs and political economy at the University of St Gallen
Felix Reitz is a PhD candidate in international affairs and political economy at the University of St Gallen, Switzerland, and holds a Master’s in international political economy from the London School of Economics and Political Science. Reitz focuses on fiscal policy, international taxation, and corporate strategy under uncertainty.
Related
Experiences, engagement, and brand extensions: Decoding the new age of luxury hospitality
14 December 2023 • by Stéphane J. G. Girod, Vanessa Signorini in Customer-centricity
Luxury firms traditionally operating in hospitality are crossing arms with luxury brands entering the sector, or so it seems. Both types of players are gaining traction and growing their respective businesses through...
Put the heart back into public services through digital and more
3 November 2023 • by Seán Meehan in Customer-centricity
Digitalization, starting with smarter chatbots, can help redefine public services and the relationship between the people and the state, says Seán Meehan....
How reverse positioning can provide a useful change of perspective
12 September 2023 • by Frédéric Dalsace in Customer-centricity
Reverse positioning can help businesses understand how they are pigeonholed by customers – and reveal opportunities to improve their standing versus the competition. ...
Learning from your customers: Why Bob matters
22 August 2023 • by Frédéric Dalsace in Customer-centricity
Your customers can tell you everything you need to know to build your business, says Professor Frédéric Dalsace of IMD provided you pick the right ones to learn from ...
Learn Brain Circuits
Join us for daily exercises focusing on issues from team building to developing an actionable sustainability plan to personal development. Go on - they only take five minutes.
Read more
Explore Leadership
What makes a great leader? Do you need charisma? How do you inspire your team? Our experts offer actionable insights through first-person narratives, behind-the-scenes interviews and The Help Desk.
Read more
Join Membership
Log in here to join in the conversation with the I by IMD community. Your subscription grants you access to the quarterly magazine plus daily articles, videos, podcasts and learning exercises.
Sign up