Written by Dr. Tuoqi Liu
发布：星球-失明治疗所&掌赢基金
I searched to find out about the most profitable companies in the world in 2023. Interestingly, almost no private companies from mainland China, except for Tencent Holding, made it to the list.
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The Industrial and Commercial Bank of China (ICBC) ranked 9th with 58.89 billion USD in profit, China Construction Bank (CCB) ranked 10th with 55.33 billion USD, Agricultural Bank of China (ABC) ranked 13th with 43.87 billion USD, and Bank of China (BOC) ranked 17th with 40.82 billion USD in profit.
Furthermore, my search revealed that China Mobile, Petrol China, and China Pacific Insurance are all State-Owned Enterprise (SOE) companies. The China National Tobacco Corporation (CNTC) is actually the world's most profitable company, with over 300 billion USD in pre-tax income annually, despite never having gone public with an IPO.
Compared to the US, Apple ranked 2nd with 99.8 billion USD, Microsoft ranked 3rd with 72.7 billion USD, and Alphabet ranked 4th with 59.9 billion in profit. They are all high-tech enterprises.
As you are aware, it is impossible for China to have profitable tech and manufacturing companies coexisting with many highly profitable monopoly SOEs, as they share consumers in the same market.
China claims to have the largest market in the world, with a population of over 1.4 billion. However, this claim is not entirely accurate for two reasons.
Firstly, Households in China often spend a significant portion of their income on essential or addictive products from the monopoly SOEs, such as diesel, electricity, loans, and cigarettes. They were leaving little to no money for other purchases. That’s the so-called “hidden tax burden.”
Secondly, the Chinese market is highly segmented, meaning regional differences exist in the products and services offered. For example, if you take an Uber or Didi ride in Shenzhen, you will find that BYD, a local Shenzhen vehicle company, makes most cars. However, if you take the same ride in Guangzhou, you will notice that Guangzhou Auto Company, a different local auto company, makes the cars. It is worth mentioning that Guangzhou and Shenzhen are located less than 100 km apart in the Pearl River delta. Due to local governments ' subsidies in strategic industries such as auto, chip, and renewable energy, the same story will repeat in cities like Shanghai, Beijing, Chongqing, and Hefei. "Even governments in poor regions have implemented non-trade barriers to protect domestic industry."
That’s why China is a tough place for entrepreneurs to run businesses. There is no unified market yet, with citizens bearing a heavy debt and hidden tax burden.
On the other hand, China has a significant potential for consumption. You probably know an interesting theory named “Acceleration Phenomenon” by Albert Aftalion, a French economist.
When a household's income passes a certain threshold, the consumption of some products and services grows much faster than their income as the population of a specific income bracket grows exponentially.
For instantly,
When China's average income grows from 10000 to 12500, it marks a 25% increase. However, the population with income above $15000 doesn't just increase by 25%; it jumps nearly 7x, from 2.3% to 15.9%.
Conclusion：
In the past three years, the consumption, commerce, and e-commerce sectors of the China A share and Hong Kong stock market have underperformed for three main reasons: overvaluation, the COVID-19 pandemic, and state-owned enterprises (SOEs), as previously mentioned.
After correcting for over three years and declining sharply in the past two months, some stocks have reached fair value while others remain overvalued. The pandemic is over, and the fear and chaos of “Dynamic zero-COVID” have passed away.
"I have noticed some positive indicators that suggest an improvement in the private enterprise situation in China.”
1, Infrastructure projects are to be halted in 12 poor provinces， and the land transferring fees have been reduced to 50% in two years, meaning local governments will eat less of the economic share.
2. Continuous interest rate cuts by PBoC and anti-corruption efforts in the finance sector will alleviate the debt burden on households and private firms.
3. Opening up the finance sector will increase competition and reduce monopoly profits.
The retail sales of consumer goods, a major indicator of the country's consumption strength, climbed 7.2 percent year on year to reach 47.15 trillion yuan last year. This contributed to over 80% of the country's GDP growth.
During the Year of the Dragon, I plan to focus more on the consumer sector.