Intensity of Competition in China: Profitability Dynamics of Chinese Listed Companies

Abstract

How intense is market competition in the Chinese economy? We extend to China, the literature that measures the intensity of market competition in terms of the persistence of firm profitability from year to year. The fundamental notion is that intense competition will quickly evaporate any short run quasi-rents enjoyed by any company, and force each to revert to its own “normal” level of profitability, as determined by its command over various strategic resources. We examine the extent to which deviations from their expected values of profitability tend to be corrected among quoted companies in China. Our estimates, based on Chinese listed companies over the 11-year period to 2005, find that the rate of mean reversion in profitability is 55%. This suggests an intensely competitive market. We also find that the state owned enterprises (SOEs) have a higher propensity to revert to their expected profitability, at the average rate of 76%, suggesting that they are subject to more intense competitive pressure.

Keywords: Intensity of competition, profitability, mean reversion, China, WTO accession, market economy

JEL Classification: M21, P27, P52