Fortune 500 list reveals need for China’s structural reform

Fortune 500 list reveals need for China’s structural reform




Nearly 100 Chinese companies made this year’s Fortune Global 500 list. (Photo/Xinhua)

Nearly 100 Chinese companies made this year’s Fortune Global 500 list released earlier this week, but a closer look at the companies reveals problems that have long plagued the country. Ninety-five Chinese firms joined the ranks of the world’s top companies, measured by their revenues in recent fiscal years. China added 16 more companies to the list, narrowing the gap with the United States, which boasted 132 corporations this year. Chinese companies accounted for 17% of the total revenues grossed by the top 500. This compares with 28%, or US$8.6 trillion, logged by US companies. However, Chinese firms on the list are mostly focused in traditional industries such as steelmaking, power generation, energy and chemicals — sectors that are either grappling with overcapacity or are dominated by state-owned enterprises (SOE). China’s unbalanced economic structure is evident in the ranking. “Very few Chinese companies on the list come from high-end manufacturing, the service industry or the technological sector,” said Zhuang Ziyin, a professor with the Institute for Advanced Studies at Wuhan University.Meanwhile, nine Chinese banks made the cut, followed by eight from the United States. The Industrial and Commercial Bank of China retained its spot as the world’s largest bank, with its 2012 revenues reaching US$133.6.

However, profits earned by nine banks, four insurance companies and 13 financial firms from China account for a whopping 56.5% of all the profits posted by 95 Chinese firms. This suggests weak profitability for businesses in the real economy amid a global downturn and domestic structural woes.

China’s economic growth slowed to 7.7% in the first quarter and a string of weak data released recently has pointed to milder expansion in the second quarter.

“Encouraging technological innovation and developing the real economy should be high on China’s reform agenda,” said Xu Zhengzhong, an economic professor at the Chinese Academy of Governance.

Chinese SOEs operating in the energy and resource sectors retained their prominent presence on the list. Sinopec, the China National Petroleum Corp and State Grid Corp of China joined a host of global resource and energy firms in establishing dominance in the top 10.

Many of these companies have also reported declining profits. Chinese steelmakers and mining companies like the China Minmetals Corp, Ansteel Group and Baosteel Group have seen their rankings plunge this year due to overcapacity and worsening financial results.

The declining trend will continue if China fails to engineer a transition toward high value-added and technology-intensive industries, Zhuang said, adding that resources and cheap labor cannot drive economic growth in a sustainable way.

Chinese technology companies are nearly absent from the list, underscoring the urgency for China to restructure its economy to a more consumption-based and technology-oriented growth model.

Only two Chinese tech firms — Lenovo and Huawei — made the cut, compared with a total of 44 tech companies on the list. Lenovo made a strong push to 329th from 370th a year ago, thanks to growing sales of personal computers and handsets, but still trails far behind Hewlett-Packard, the world’s largest PC manufacturer, as well as tech heavyweights Apple and Samsung.

Meanwhile, telecoms equipment maker Huawei jumped to 315th from 351st a year ago, surpassing Stockholm-based Ericsson in the rankings with increased revenues and solid earnings propelled by smartphone sales.

The average debt to equity ratio for non-financial Chinese companies on the list came in at 4.42, much higher than the 2.79 seen in US companies, a sign that Chinese companies are relying too heavily on borrowed money for business expansion.

While China’s SOEs took up a growing share among the top 500, the country’s private sector has largely missed the party.

Five private Chinese companies made the list last year, marking the debut of China’s private sector in the rankings. Two more companies were added to the list this year: the Shenzhen-based Amer International Group and China Minsheng Banking Corporation.

“China’s private sector should become a mainstay in global business competition and a key driver of China’s economic growth going forward,” Xu said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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