Egan-Jones Examines Why China's Growth Has Not Rewarded Shareholders

Egan-Jones says China’s economy grew at least twice as much as the US economy from 2004 to 2025, while the iShares China Large-Cap ETF returned less than half as much as the US total market, including dividends. It attributes the gap partly to intense competition that has pushed Chinese companies’ returns below their cost of capital; Chinese large-cap earnings trade at a little over one-third the US valuation, with geopolitical risks also weighing. The analysis warns that falling AI costs and heavy technology-sector spending could intensify competition in US industries and make the premium on US equities harder to defend.

Analysis

Competition, not GDP growth, is the key equity variable: when capacity and entry expand faster than demand, consumers capture productivity gains while company returns on capital and valuation multiples compress. That makes China’s low multiple a potential value trap, not an automatic catch-up trade; a durable rerating needs evidence of capacity exit, firmer pricing, and improving industry returns. Geopolitical access risk remains an independent discount.

For Ford (F) and General Motors (GM), the implication is not a direct read-through from Chinese EV margins. It is a warning that global EV price competition can transfer cost declines to buyers before incumbents earn acceptable returns. Without company-specific China exposure, pricing, and EV profitability data, there is no basis here for ranking the two. In the US, AI creates a similar risk if cheaper capability lowers barriers to entry and weakens software pricing power; meanwhile, heavy investment can accrue to customers rather than infrastructure providers unless monetization keeps pace.

Near term, this is a framework rather than a new earnings catalyst. Over 1–3 months, watch auto pricing/incentives and software renewals or retention; over 6–18 months, the test is whether capacity rationalizes and AI spending produces durable revenue and returns. The contrarian risk is that investors overgeneralize China’s outcome: consolidation can eventually restore pricing power, while AI may reinforce a small number of platforms rather than broaden competition. Falsifiers include sustained EV price stabilization and improving automaker margins, or AI providers demonstrating monetization alongside spending.

Key Decisions for Investors

• Do not initiate a directional F or GM trade on this commentary alone. Reassess if reported EV pricing, incentives, or segment profitability show sustained deterioration; compare the companies only after verifying their respective China exposure and EV economics.
• Treat FXI as a watch, not a valuation-only long. Consider exposure only alongside evidence of capacity closures, price stabilization, and improving returns on capital; renewed price wars or escalation in geopolitical access risk would invalidate the thesis.
• For US software, monitor renewal rates, retention, and pricing alongside AI-related capex. A short or underweight becomes more compelling if those operating measures weaken while investment remains elevated; improving monetization would falsify it.
• Avoid assuming AI infrastructure spend automatically benefits suppliers: require evidence that customer revenue and returns are keeping pace with capital outlays before adding exposure.