American companies are supplanting China from the world’s 500 biggest stocks faster than at any time in the past decade, as an improving U.S. economy and investor confidence in free markets overcomes the lure of equities offering twice the profit growth.
U.S. corporations led by Apple Inc. and Exxon Mobil Corp. (XOM) make up 171 of the top 500 with a market capitalization of $10.6 trillion, or 40.3 percent of the total, compared with 159 valued at $8.24 trillion in 2009, data compiled by Bloomberg show. PetroChina (857) Co. and Industrial & Commercial Bank of China Ltd. lead the 24 Chinese firms worth $1.74 trillion qualifying today, down from 34 with a capitalization of $2.19 trillion.
China’s share of the world’s biggest companies diminished even though its government-directed economy has continued to expand while the U.S. and Europe showed anemic growth during the past four years. While the Standard & Poor’s 500 Index (SPX) doubled since reaching a 12-year low in March 2009, the Shanghai Composite Index fell 6.5 percent on concern state ownership of business means investors aren’t the first priority. Valuations for Chinese companies declined to half of those in the U.S.
“The discount in valuation is reflective of not having very specific private-property laws in China,” Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., said in a Nov. 27 phone interview. His firm oversees $646 billion. “There’s no guarantee that what the company owns, the company will be able to keep in the long run. The U.S. is in a better position.”
The S&P 500 rose 0.5 percent last week as U.S. leaders prepared to negotiate a budget deal, extending the 2012 gain to 13 percent. The Shanghai index slumped 2.3 percent, touching the lowest level since 2009, amid concern the nation is poised for the worst economic slowdown in a more than a decade. The Chinese equity benchmark is down 10 percent this year, heading for its third annual loss.
The S&P 500 advanced 0.2 percent to 1,418.70 at 10:28 a.m. in New York today, while the Shanghai Composite closed 1 percent lower.
Economic expansion that was three times faster in China failed to keep America’s proportion among the biggest companies from expanding as investors sought the relative safety of U.S. stocks. While the world’s most populous country boosted gross domestic product by 62 percent from 2009 to 2011 and passed Japan to become the No. 2 economy, its share of the top 500 fell to 6.6 percent from 9.3 percent, the biggest drop over the comparable period since Bloomberg data began in 2002.
Earnings from the largest companies in China increased by sevenfold on average over the past three years, more than double the rate for American corporations, according to data compiled by Bloomberg.
Faster growth isn’t being rewarded as the combined value of mainland companies fell 9 percent since the end of 2009, compared with an advance of 31 percent for top American stocks. Chinese shares trade at 8.3 times reported earnings in the past 12 months, compared with 15 in the U.S., Bloomberg data show.
Chinese stocks fell after President Hu Jintao directed banks to lend to local governments during the global financial crisis and artificially low retail fuel prices hurt refiners. All but five of the 23 largest mainland companies are government-controlled, the data show.
“It’s still not clear if those companies in China have full discretion to maximize profits,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $170 billion, said in a Nov. 27 telephone interview. “There’s no doubt that the U.S. is an area that people go for safety. In a global crisis, the U.S. is probably going to fix itself first.”
ICBC ceded its No. 4 spot in 2009 and dropped to eighth place in the 500 ranking this year, valued at $222.2 billion, amid concern loans extended to local governments and developers won’t be repaid. The Beijing-based company is still the world’s largest bank by market value, topping HSBC Holdings Plc by 18 percent and Wells Fargo & Co. by 28 percent.
While more than $4.3 trillion in loans helped maintain a quarterly economic expansion of at least 6.2 percent during the global financial crisis, compared with a contraction of as much as 8.9 percent in the U.S., China’s bad loans increased for a fourth straight quarter in the three months ended Sept. 30, the longest streak of deterioration since the data became available in 2004, the China Banking Regulatory Commission said on Nov. 15.
PetroChina, the world’s biggest company in 2009, has slipped to third with a market capitalization of $248.5 billion. The Beijing-based energy producer reported its lowest third- quarter profit in at least five years on Oct. 30 because of refining losses and natural-gas import costs. PetroChina, 86 percent owned by the government, incurred losses on refining as the state kept retail fuel prices low to fight inflation.
Chinese rankings will improve in coming years as growth picks up, according to Russ Koesterich, chief investment strategist of New York-based BlackRock Inc., which oversees $3.67 trillion as the world’s largest asset manager.
“The reality is China is still growing a lot faster than the U.S.,” Koesterich said in a Nov. 28 phone interview. “While growth is not going to go back to 10 percent, growth of 7 or 8 percent in a slow-growth world is still pretty good. Chinese companies look cheap.”
Industrial production, exports, fixed-asset investment and retail sales accelerated in October, government reports showed last month, signaling that economic growth will exceed Premier Wen Jiabao’s 7.5 percent target for his last year in office. Growth will climb to 8.1 percent in 2013, according to the median estimate of 46 economists surveyed by Bloomberg.
In China, where manufacturing, mining and construction account for about half of the country’s total output, companies like Baoshan Iron & Steel Co. (600019), property developer China Vanke Co. and gold producer Zijin Mining Group Co. exited the top 500, according to data compiled by Bloomberg.
Baoshan, based in Shanghai, plans to produce 24 million metric tons of steel this year, enough to build 218 copies of the Bird’s Nest Olympic stadium in Beijing. While the output target is more than double the U.K.’s total production in 2011, the stock fell 3.7 percent this year and is down 52 percent since the end of 2009.
Vanke plans to construct 8.9 million square meters of housing this year, or almost triple the size of New York’s Central Park. Shares of Vanke, based in the southern Chinese city of Shenzhen, are up 21 percent over the past three years to HK$12.
American companies entering the ranking included an online travel agent and a social network operator: Priceline.com Inc. (PCLN) and Facebook Inc. (FB) Services make up 80 percent of the U.S. economy, Commerce Department data show.
Computer and software companies are biggest industry among the largest American stocks, accounting for 21 percent. Apple (AAPL), which approached bankruptcy in 1997, is ranked No. 1 with a market capitalization of $550.6 billion. Shares of the Cupertino, California-based company climbed from the 12th spot in 2009 after surging sales of iPhones and iPad computers drove the stock up 193 percent over the past three years.
Exxon, based in Irving, Texas, reclaimed its title as the world’s largest energy company, with a market value of $401.9 billion. The stock has advanced 29 percent since the end of 2009 as the company boosted dividends for 30 straight years and spent $22.1 billion repurchasing stock in 2011.
Wal-Mart Stores Inc. (WMT) in Bentonville, Arkansas, replaced ICBC as the world’s fourth-largest company, valued at $242.1 billion. The retailer is up 21 percent this year as its low prices boosted sales for 13 consecutive quarters.
State interference makes Chinese corporations less transparent, according to short-seller Carson Block, founder of Muddy Waters LLC. The government makes valuing stocks difficult, said Block, who bet on declines in Chinese companies listed in North America, including Sino-Forest Corp.
“China has gotten harder in the sense that the government has really taken the side of the fraud,” Block said in a Nov. 27 interview on Bloomberg Television. “When you are up against that sort of strength of the ability to revise history, it becomes difficult.”
China began limiting access to corporate filings at the State Administration for Industry and Commerce this year after short sellers used them to highlight accounting discrepancies in companies listed abroad, lawyers including Nathan Bush, a Beijing-based partner at the law firm O’Melveny & Myers LLP, said in interviews in June.
The diverging path in the world ranking reflects the approach of central bankers in China and the U.S., said Nicholas Yeo, head of China and Hong Kong equities at Aberdeen Asset Management Plc, which oversees $302.4 billion globally.
The Federal Reserve has announced unprecedented bond purchases and kept interest rates at near zero since 2008 to boost the economy. Fed Chairman Ben S. Bernanke pledged in September that the central bank will buy $40 billion of mortgage securities a month until the U.S. labor market recovers.
The People’s Bank of China raised its benchmark interest rate five times in 2010 and 2011 before cutting twice this year. The central bank increased the amount banks are required to hold in reserve 12 times in 2010 and 2011, and announced three reductions since November last year.
“The slowdown in China is self-inflicted,” Yeo said in a phone interview in Hong Kong on Nov. 26. “The U.S. market has recovered and done pretty well this year because of incipient signs of recovery.”
The world’s largest economy is moving faster toward its level of growth before 2008 than China. GDP is forecast to gain 2.2 percent this year, according to the median estimate of 79 economists surveyed by Bloomberg.
That compares with an average of 2.6 percent between 2002 and 2007, before the credit crisis, the data show. China is projected to expand by 7.7 percent, the slowest since 1999, compared with its mean rate of 11.2 percent before the global recession.
“While the U.S. is growing well below average, at least the growth rate is more or less stable,” David Sowerby, a fund manager at Boston-based Loomis Sayles & Co., said in a Nov. 27 telephone interview. His firm oversees about $180 billion. “China is still a developing market and is subject to episodes where it stubbed its toe.”
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