June 18, 2026 | 15th Five-Year Plan | Economics
Many people find it strange that, even though China’s industrial strength is nearly twice that of the U.S., the Chinese stock market’s performance is relatively weakly. What are the reasons behind this phenomenon?
U.S. suppression can be considered a major factor. Since U.S.-China relations shifted toward intense competition in recent years, the U.S. has done much to undermine China’s financial sector—for example, by advocating that China is an uninvestable market, implementing various policies to restrict capital flows into China, targeting Chinese companies, and imposing restrictions on high-tech products. These actions have indeed caused trouble for China. However, U.S. suppression is merely an external factor that China faces; it is only one of the factors determining the course of events, and it is certainly not the decisive factor. Otherwise, if U.S. pressure were the sole determining factor, how could one explain the fact that China’s industrial strength has far surpassed that of the U.S.? Has the U.S. not been suppressing China’s industrial development?
It is evident that while U.S. pressure has had a certain negative impact on China’s financial development, it does not play a decisive role. Some analysts, looking at corporate profitability, point out that although some U.S. companies show strong growth momentum and boast staggering market capitalizations, their valuations are not expensive—and in certain cases, valuations actually decrease as prices rise (due to faster profit growth). By contrast, many Chinese companies, regardless of size or market share, seem trapped in a vicious cycle of low-price competition, sacrificing profits to gain market share. The result is the paradoxical situation where the harder they work, the less money they make, which in turn affects their valuations and stock market performance.
Why do U.S. companies become more profitable as they grow larger? For example, the “Magnificent 7” have contributed the bulk (nearly two-thirds) of the U.S. bull market over the past few years. A single company like Amazon has a market capitalization of $2.6 trillion, yet its P/E ratio is only about 29; Meanwhile, Xiaomi, one of China’s major tech stocks, has a market capitalization of about $84 billion, but its forward P/E ratio remains around 22 times, suggesting that, in terms of valuation, it is not significantly cheaper than Amazon.
What is the root cause of this stark contrast between U.S. and Chinese stock markets and corporate earnings? The author believes it may stem from two factors: industrial policy and cultural differences.
First, the biggest difference between China and the U.S. in terms of external conditions for industrial development lies in industrial policy. In the past, the U.S. had very little industrial policy, but in recent years, seeing the remarkable effectiveness of China’s industrial policy, it has begun to emulate it.
A distinctive feature of China’s industrial policy is the combination of financial resource allocation and local competition. Simply put, when the government identifies a particular industry as a development priority, financial resources—led by banks—follow suit. This financial support provides the industry with more abundant and lower-cost financial resources to promote its development. Local competition refers to the competition among local governments to attract industries, with each vying to offer various preferential terms—such as low-cost land, tax breaks, and various incentives. As a result, a myriad of subsidized enterprises spring up, and the industry rapidly reaches a large scale, leading to cutthroat competition among companies vying for market share.
Since local governments’ primary source of tax revenue is value-added tax—which is generated as long as enterprises are in production—local governments go to great lengths to prevent enterprises from going bankrupt in order to safeguard local tax revenue, even if these enterprises are suffering significant losses due to cutthroat competition. This makes it difficult for the market to clear itself and restore the balance between supply and demand through the natural law of survival of the fittest. Consequently, the competitive environment for enterprises remains consistently harsh, and most enterprises find it difficult to turn a profit.
Second, regarding cultural differences, the most typical characteristic of Chinese business culture is a preference for “small margins and high volume” to expand market share. This differs significantly from the situation in the U.S. and Europe, where the primary purpose of establishing a business is generally to generate profits, not to compete for market share.
One example vividly illustrates the difference between Chinese and Western business cultures: suppose a company is making a decent profit. In the U.S. and Europe, if someone wants to get involved, they would typically do so by purchasing a stake in the company; in China, however, if someone notices that a company is profitable, their first instinct is often not to invest but to mimic its business model by opening a competing business nearby and undercutting prices to attract customers. Before long, a company that was originally doing quite well finds itself caught in a vicious cycle of competition as similar businesses spring up one after another in the vicinity, resulting in none of them turning a profit.
What makes this business model in China so formidable is that companies are thrown into a cutthroat competitive arena with harsh survival conditions from the very beginning, forcing them to make progress rapidly, improve efficiency, and reduce costs. Companies that survive this grueling trial typically possess extremely strong resilience. When competing against U.S. and European firms, unless their technology and products are inferior to the competition such that there is no direct competition, Chinese companies generally dominate their rivals in conditions of similar technological and product quality. From the perspective of the average consumer, when comparing similar products, the price gap between Chinese products and those from the U.S. and Europe often ranges from several to dozens of times, rendering the latter completely uncompetitive.
However, the downside of this model is that companies are often locked in a cycle of cutthroat competition—not only while fighting for market share but also after securing it. Even when Chinese companies hold 90% of the global market share—almost a monopoly—they still engage in cutthroat competition with one another and would rather turn no profit together. A typical example is the photovoltaic industry, where Chinese companies control nearly the entire global supply chain yet still engage in cutthroat competition, resulting in losses across almost the entire sector. If this model continues indefinitely, when can these companies ever turn a profit?
It is understandable that cutthroat competition arises when companies are expanding their scale and attempting to capture market share, as they hope to recover from their losses and turn profitable once they secure a larger market share. However, if this temporary measure becomes the permanent norm, the logic behind cutthroat competition ceases to hold.
The correct approach should be this. A certain degree of cutthroat competition while companies are vying for market share is understandable—as doing so helps strengthen their competitiveness—but once the market becomes relatively mature and stable, scale and production capacity must be reined in to ensure corporate profitability and a relatively healthy competitive environment.
According to this logic, now that China’s industrial sector has risen to become the world’s largest, with the exception of a few lagging industries, a significant number of leading industries need to focus on improving corporate profitability rather than prioritizing market share and continuing to engage in “involution”.
The 15th Five-Year Plan proposes to tackle “involution-style” competition comprehensively. The government has already implemented a series of measures, including regulating local authorities’ investment promotion activities, prohibiting unreasonable preferential policies such as tax and land use incentives, accelerating the development of a unified national market, and holding talks and raising requirements with platform companies. However, relying solely on these measures may not be sufficient, nor could they effectively motivate individual enterprises.
After all, given the actual circumstances and corporate culture in China, expecting individual companies to self-impose limits to control their scale and boost profits may not yield very good results, as no company is willing to voluntarily restrain itself and allow the market to be captured by competitors. This is a classic collective action problem.
To address this problem, an effective approach could be establishing an industry association (similar in function to OPEC) under government leadership or regulation. Companies whose combined market share reaches 80% (ranked from largest to smallest) must join this association. The association works to regulate production scale and pricing, thereby safeguarding normal profit levels and ensuring orderly competition among enterprises.
The association should coordinate both domestic and international markets, so as to prevent companies from shifting production capacity to another market after restrictions are put in place in one market.
The association should include mechanisms that allow well-performing enterprises to make advancement in terms of production scale and vice versa. Generally, the association may independently regulate the production scale of its member companies; if the association cannot reach a consensus, the government may intervene to compel companies to set their scales according to current proportions.
In practice, of course, compatibility with relevant laws must also be considered. Take Japan’s “Act on Prohibition of Private Monopolization and Ensuring Fair Trade” as an example: it establishes an “administrative exemption mechanism” based on industrial policy or the public interest. If relevant industry associations meet specific conditions, they may be exempted from certain anti-monopoly reviews in accordance with individual industrial regulations or upon approval by administrative authorities.
In fact, there have already been precedents for restricting the scale of competitive industries and raising prices, the results of which have been remarkable. Take China’s rare earth industry as an example: comparing prices before and after restrictions are put in place on rare earth exports, prices for various rare earth elements typically increased by several folds, and listed rare earth companies are also performing very well. The rare earth index has more than tripled from its 2024 low to this year’s high, clearly demonstrating that reducing output to raise prices has an extremely positive impact on corporate profitability and the performance of listed companies.
For China’s competitive industries, the current spillover of vicious “involution-style” competition not only harms the interests of Chinese enterprises themselves, but also means that Chinese people who have worked so hard to produce goods cannot reap the full benefits they deserve. Furthermore, China faces criticism from foreign countries for “dumping” and is even subject to tariffs, which turn the benefits China rightfully deserves into the fiscal revenues of other countries. If China can proactively reduce export volumes and raise export prices, it will not only enhance the wellbeing of the Chinese people, but also make it difficult for the U.S. and Europe to attack China—a win-win situation. Why not?
Moreover, once the policy of raising prices and reducing output is fully implemented, corporate profits and the stock market are expected to improve immediately, which will help boost the domestic economy.
George Yang is a renowned macroeconomist and a visiting professor of the Hong Kong Financial Services Institute. He has decades of management experience in the financial sector.
The views expressed in this article are the author’s own, and do not necessarily represent the institutional stance of the Hong Kong Reform Institute.
Translated with AI, with subsequent editing done manually.