China’s Top 500 Companies See Asset-Profit Ratios Drop to 10 Year Low

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The asset-profit ratios of China’s top 500 companies have fallen to a decade-long low as asset expansion outpaces growth in revenues.

The latest “2017 China Top 500 Enterprise Report” (2017中国企业500强报告) released by the China Enterprise Federation indicates that while both operating revenues and total assets for the country’s leading companies are seeing gains this year, asset expansion is now significantly outpacing earnings growth.

According to the report total operating revenue for China’s top 500 companies is set to break through the 60 trillion yuan threshold for the first time this year to reach 64 trillion yuan in total, for a 7.64% year-on-year increase following the past two consecutive years of decline.

The operating revenues of four companies – Industrial and Commercial Bank of China, PetroChina, Sinopec and State Grid, are set to exceed 1 trillion yuan, while a further 157 companies will see operating revenues breach the 100 billion yuan threshold.

The total asset scale of China’s top 500 companies is set to see a year-on-year increase of 13.8% to reach 256.13 trillion yuan, for a second consecutive year of increase, while the threshold for joining the ranks of the China’s top 500 companies has increased more than 13-fold over the past fifteen-year period, from 2 billion yuan in 2002 to 28.311 billion yuan this year.

The total net profits of China’s top 500 companies are set to reach 2.82734 trillion yuan, for an increase of 4.12%, holding steady with last year.

CEA data indicates, however, that net profit growth has diminished steadily over the past three years, from 233.1 billion yuan in 2014, to 174.3 billion yuan in 2015, 162.8 billion yuan last year and just 87.1 billion yuan this year.

Key earnings indicators have weakened as consequence, with the revenue-profit ratio sliding 0.19 percentage points year-on-year to a ten year-low of 4.42%, and the asset-profit ratio also hitting a decade-long low of 1.10% following six consecutive years of decline.

Mou Rong, vice-chairman of the CEA research department, said to Economic Information Daily that the steady growth in the total assets of the top 500 companies over the past two years marked a turn-around compared to a series of the volatile ups-and-downs since the GFC.

“What needs to be noted, however, is that despite the increases in [asset and revenue] scale, profit growth rates have declined continuously for multiple years,” said Mou.

Wang Zhongyu, CEA head, said that China enterprises will need to ascend the global value chain in order to shore up profitability.

Wang points out that ever since joining the World Trade Organization at the start of the 21st century, many Chinese companies have achieved rapid growth by using low-cost labour advantages to integrate into the global value chain, transforming China into the “factory of the world.”

In Wang’s opinon, however, China remains on unequal terms compared to Western multi-nationals when it comes to international competition, with the later retaining firm control of the high-end linkage of the global value chain.

For this reason he contends that China will find it difficult to break through the “low-end trap,” due to lack of ability to compete against advanced Western countries when it comes to the high-end links of sectors such as arm manufacturing, information technology, pharmaceuticals, semi-conductors and microchips.

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