The gap between China's growth and profits

The speed and accuracy with which the world's second-largest economy publishes its gross-domestic-product (GDP) data regularly provokes astonishment. Even for the very turbulent year 2020, Beijing's statistics authorities once again managed to publish the GDP figures for the country with a population of 1.4 billion less than three weeks after the end of each quarter. And these rapid estimates proved remarkably precise. For two quarters of the year, GDP growth had to be revised later by 0.2%, in the other two quarters by only 0.1%.

Investors are less interested, however, in speed than in the magnitude of growth. And in China the scale of growth has been as impressive as the speed with which the figures are delivered. Between 2011 and 2022, the country grew by an annual average of more than seven percent in real terms, producing a doubling of GDP in this period. As a shareholder, you would like to be part of that, as the high growth should be reflected in corporate profits. But as our Chart of the Week shows, the (even nominal) earnings growth of listed companies lags well behind GDP growth. Whether this is testimony to either GDP or earnings figures not being representative of reality or of heavy financial burdens being put upon corporates is hard to judge. The U.S. figures are slightly odd as well, but for the opposite reason, as profits of S&P 500 companies have grown almost twice as fast as GDP.

Investing in the era of AI

Artificial intelligence is likely to prove one of the most consequential developments to emerge during our professional lives as asset managers.

Cumulative growth of GDP and corporate profits (2011-2022)

^{1 S&P 500}

^{2 MSCI Europe Index}

^{3 MSCI China Index}

^{* Earnings per share before extraordinary items}

^{Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 8/22/23}

Although one might find some structural reasons why profits can grow faster than GDP for some period of time, this development cannot go on forever. Not least, because large parts of the population might become dissatisfied if the gap between capital income and earned income grows further. The figures for Europe look comparatively unexciting in this respect.

What is to be made of the gulf between GDP and corporate profit figures in China? First, perhaps stock investors should put less reliance on Chinese GDP figures as a sign of the country’s economic health, however quickly and seemingly accurately Beijing provides these figures. Secondly, especially China is, in our view, a country in which active selection can create additional value. "Ignoring China as a shareholder would be a simple solution but it’s one that throws the baby out with the bathwater – individual sectors and stocks can be very attractive, despite everything," says Sebastian Kahlfeld, DWS Senior Portfolio Manager Emerging Markets.