With the world paying close attention to the geostrategic tensions between the United States and China, it is surprising that little coverage was given to what could be seen as a major development in superpower competition. Last week Fortune released its latest Fortune Global 500 list, and for the first time China had the largest number of companies represented. Chinese firms slightly outpace those from the United States, 124 to 121, and are way ahead of third-place Japan, which now has only 53 companies on the list. China now has more firms on the list than France, Germany and Great Britain combined.

Figure 1: Fortune Global 500 Companies, 2000-2020

Fascination with China’s place in global rankings goes back at least to the early 1990s, when the International Monetary Fund (IMF) began issuing estimates of gross domestic product (GDP) calculated by purchasing power parity (PPP) that showed China’s economy was approaching the size of Japan and the United States. According to the IMF, China passed the US in PPP terms in 2014, and now the debate is about when it will take the lead in nominal terms.

CHINESE COMPANIES IN THE FORTUNE GLOBAL 500 (2020)The Fortune list is the most conspicuous corporate equivalent of the economy-wide GDP comparison. Although eye-catching, the reality is that in some ways both are overhyped. We have dug a little deeper into the numbers – and individual companies – and the overall rankings tell far from the whole story. China now has the largest number of companies on the list and some of them have become much more formidable in their industries, but in general Chinese companies are still far from the world’s strongest. This conclusion is not new, but in an era of greater conflict and loudening calls to counter growing threats, it is more important than ever to be empirical. Here is what the data tells us.

The United States and China Stand Out in Scale

In terms of size, it is a two-country race. The US and China now accounting for almost half of all Fortune Global 500 companies. Over the last two decades, the number of Chinese firms has grown over twelve fold, while the proportion of American firms has fallen by one-third, from 36% to 25%. Similarly, over this period, the number of Japanese firms has been cut in half, now down to only 11%. Meanwhile, the share of companies from other advanced economies have also dropped. Almost all of the gains have gone into China’s column.

Both American and Chinese firms also far outpace their counterparts in other size metrics, including revenue, profits, assets, and employees. But while Chinese entrants have surpassed American firms in terms of numbers and total assets, the US still is substantially in front of China when measured by annual revenue, $9.8 trillion to $8.3 trillion.

Figure 2: Revenue and Assets Among Top Fortune Global 500 Countries (2020)

Middling Performers

Despite their gargantuan size, or perhaps because of it, Chinese firms look less impressive when measured in terms of profitability. Their profit margin (profits/revenue) in 2020 was 4.5%, just slightly ahead of France (4.3%), but much lower than firms from Switzerland (8.3%), the US (8.9%) and Canada (9.1%). The story is even worse for return on assets (ROA). China’s 124 listed companies averaged an ROA of 1.9%, still just ahead of France (1.7%), but once again substantially behind Switzerland (4.2%) and the US, which led at 4.9%.

Figure 3: Profit Margin (2020)

Figure 4: Return on Assets (2020)

Why do Chinese perform so poorly relative to other Fortune 500 firms? It’s simple: state-owned enterprises (SOEs). China’s largest firms in most industries are SOEs, and 91 of the 124 Chinese members to the latest Fortune Global 500 are SOEs. It’s worth noting that our count differs from that of Fortune, which classifies only 68% (84) of the Chinese firms as SOEs. They sorted based solely on whether a state entity holds more than 50% formal ownership; our decision also took into consideration actual corporate control. For example, Fortune labels Gree, an appliance maker based in Zhuhai, as private, but on its website, Gree clearly states that it’s a locally-owned SOE.

Figure 5: Chinese Companies by Ownership (2020)

Others have long documented how inefficient Chinese SOEs are in absolute terms and in comparison to their counterparts in the private sector. Hence, it is not surprising that whereas SOEs currently account for 73% of Chinese by number of firms, they represent 78% of total revenue and 84% of all assets from Chinese entrants to the list. Equally unsurprisingly, the difference in profitability of the Chinese SOEs and private firms on the list is wider than the Yangtze River. SOEs’ average ROA is a measly 1.2%, one-third the level of private firms. And their average profit margin is only half that of Chinese private companies.

Figure 6: Ownership Matters: ROA and Profit Margins for Chinese Firms (2020)

This is not to say that SOEs are all old dinosaurs who should have all died off decades ago. In fact, as recent analysis shows, the amount of government largesse they receive relative to private companies has fallen by some measures. Nevertheless, as has been widely documented, China’s massive and growing stock of corporate debt is disproportionately situated on the balance sheets of SOEs.

Figure 7: Sectoral Distribution of Chinese Companies (2020)

A common retort is that SOEs are primarily situated in capital-intensive sectors that address public needs, such as utilities, and thus are inevitably less profitable than private companies. But side-by-side comparisons of Chinese SOEs and private firms in the Global Fortune 500 in the same sector do not bear this out (download the full list). For example, the state-owned Industrial & Commercial Bank of China (#24) has an ROA of only 1.0%, while the private China Merchants Bank (#189) has an ROA of 1.3%. Similarly, the ROA for China State Construction Engineering (#18) is far below that of the Pacific Construction Group (#75), 1.1% to 5.4%. For two illustrative cases, see the brief profiles below of Ping An Insurance and the Aviation Industry Corporation of China (AVIC).

Figure 8: Regional Distribution of Chinese Companies (2020)

There is one final way in which the Chinese representatives are distinctive. An amazing 54 of the 124 companies hail from the Chinese capital, Beijing. Before you go thinking that the municipality should also now have the title of China’s commercial capital (Shanghai has only 9 firms on the list), you should know that 50 of the 54 are SOEs, and of them, 48 are “central SOEs,” directly under the authority of the national government, either the State-Owned Assets Supervision and Administration Commission (SASAC) or the Ministry of Finance. Hence, their headquarters may be in Beijing even if most of their commercial operations are elsewhere in the country. This regional distortion is just another signal that even after 40 years of “opening and reform,” the state still plays an outsized role in the life chances of the country’s companies.

Source: CSIS