China is the world’s second-largest economy, but it remains largely inscrutable to outsiders. The government has made concerted efforts to improve transparency in recent years, recognizing that investors who understand the market are more willing to participate in it.
Chinese accounting standards have undergone wholesale revision in order to bring them more in line with international norms, and they now apply to all listed firms and a growing number of non-listed players. On the regulatory side, there is more emphasis on disclosure than ever before, albeit from a relatively low base.
Yet there remains a fundamental lack of trust in the market. This is perhaps largely explained by the absence of a transparent rule of law and state dominance of certain key sectors, which makes it harder to hold companies to account. These problems are by no means unique to China, but they shape investors’ approach to the market.
China Economic Review’s primary function has always been to provide an independent view of the country’s economy and business to those participating in it, either on the ground or from overseas. With this in mind, we are creating a series of indexes that track and to a certain extent quantify the trends that appear in our editorial coverage.
The first of these is The CER 1000 – an index of the top 1,000 companies operating in China.
The index is a simple, non-weighted measure based on revenues derived from the Chinese mainland only. Private sector enterprises known for their massive export volume and state-owned firms with substantial revenue streams generated overseas are assessed purely on what they sell to the domestic market.
The bulk of our calculations derive from publicly available information. However, in those instances where information is not in the public domain – such as multinationals that don’t offer country-specific breakdowns of their revenues – it was necessary to analyze companies’ China-based activities and produce an estimate. We were guided in this by a senior researcher from the China Europe International Business School (CEIBS) in Shanghai.
The industries and companies that dominate The CER 1000 are typical of a country in the midst of industrialization and urbanization.
The three largest industries represented are engineering and construction (140 companies), metals (123) and chemicals (71). Mining and industrial machinery also feature in the top 10. Between them, these industries are responsible for building much of China’s infrastructure as well its component parts.
The prominence of autos, electronics and household goods points to a growing consumer market, but this must be placed in context. Look at the top 10 industries represented in the Fortune 1000, which tracks US firms, and you get an idea of how far China has to go. Strong domestic health care, financial services, communications and retail industries are the hallmarks of a mature consumer-driven economy.
State-owned dominance
As for the companies themselves, The CER 1000’s top 10 should come as little surprise: State-owned enterprises (SOEs) from the energy, finance, construction and telecom sectors dominate. These sectors are heavily regulated and market entry is tightly restricted, which helps to protect and nurture the state-run giants.
State-owned firms account for 37.6% of the index, with the private sector making up 50.2% and foreign firms 12.2%. But SOEs enjoy the bulk of the revenues, accounting for 70% of the overall total, compared with 20% for private sector firms and 10% for foreign firms.
Most of the private sector top 10 have grown rich making or selling the household appliances that underpin much of China’s nascent consumer market. For the purposes of The CER 1000, private sector or non state-owned firms are defined as enterprises in which state-owned investors, if there are any at all, are minority shareholders. Yet the top 10 list of private companies includes several firms known to have close ties to state-owned interests, which may or may not be direct shareholders.
Success in China, even for an entrepreneur, continues to rest largely on maintaining good relations with the government.
Most of the top 10 foreign firms in The CER 1000 can also be tied to rising Chinese consumption. Foreign auto brands are by far the biggest sellers in one of China’s fastest-growing industries, generating revenues that are shared with local joint venture partners.
As for the Japanese and Korean high-tech firms, the evolution of their business models in China reflects the development of the economy itself. Having entered the country early, setting up a range of subsidiaries with a view to building products for export, over the years they have also developed healthy businesses serving the domestic market as well.
The progress of these companies, and their respective sectors, will in turn be reflected in The CER 1000.