Can manufacturing corporations increase profit rates by expanding financial activities? An example of Chinese A-share listed manufacturing corporations

【Author】

XIE Fusheng;KUANG Xiaolu

【Institution】

School of Economics, Renmin University of China;National Research Center for Political Economy of Socialism with Chinese Characteristics;School of Economics, Renmin University of China

【Abstract】

China, as the world largest developing country, has been experiencing transformation from real economy to virtual economy since 2012, which shows similarities to financialization. Furthermore, transformation from real economy to virtual economy in real sector is similar to financialization of non-financial corporations (NFCs), which means the deceleration of the productive accumulation and the expansion of financial speculative activities in NFCs. Data show that in 2018, the total financial assets held by Chinese A-share listed manufacturing corporations reached CNY 685 billion, which is seven times that of 2007. The concern about causes and influences of expansion of financial speculative activities in Chinese NFCs has aroused wide discussions in the Chinese academia. However, the existing literature rarely discusses the impact on corporate profit rates. Profit is the fundamental funding source of corporate operation, production and innovation, while profit rate is the core index reflecting corporate operating conditions and future development prospects. At present, China’s real economy is struggling so that many manufacturing corporations expand financial activities to make up for the decline in profit rates. There are two possible results. On one hand, the expansion of financial activities will increase overall profits directly and increase both productive and overall profits by reservoir effect. On the other, it may also decrease productive and overall profits by crowing out effect. Under such circumstances, whether the expansion of financial activities will effectively improve the profit rates of manufacturing corporations has become an important problem. Based on the theory of financialization of NFCs, this article explained the current situation and motivation of Chinese manufacturing corporations expanding financial activities, and systematically analyzed the impact of financial activities on corporate profit rates. Based on the data of Chinese A-share listed manufacturing corporations during 2007–2018, the empirical results show that the expansion of financial activities of manufacturing corporations in China has significantly inhibited their productive profit rates, but the passive effect on the overall profit rates has not been obvious. This passive effect weakens when profit rates increase and strengthens when profit rates decrease. It indicates that there are two dynamic equilibrium mechanisms. When profit rates are low, expanding financial activities will further suppress the profit rates and it will form a vicious circle; when the profit rates are high, expanding financial activities can promote the profit rates and it will form a virtuous circle. The current level of profit rates in China’s real economy is relatively low, so excessive participation in financial activities will lead worse results. Therefore, it is necessary to regulate the financial activities of NFCs and pay more attention to supply-side structural reforms, improving the ability of the supply system to adapt to changes in demand, and effectively increasing profit rates of manufacturing corporations by increasing operating income. The possible marginal contributions of this article are as follows. First, we illustrate that the expansion of financial activities of manufacturing corporations resulted from the decline of profitability of real sector and the prosperity of financial sector. Secondly, we divide profit rates into productive and overall profit rates, and then introduce the dynamic nonlinear relation between financial activities expansion and two kinds of profit rates, and point out that these relations are related to the level of profit rates themselves. Finally, we suggest that solving transformation from real economy to virtual economy should focus on production and finance instead of only on finance.

【Keywords】

financialization of non-financial corporations;profit rates;supply-side structural reforms

References

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Springer Journals Database

Total: 36 articles

  • [1] LJ Cuangzi LIU Li, Debt Financing Cost and Credit Discrimination on Private Listed Firms, Journal of Financial Research,
  • [2] Gan Chunhui,Zheng Ruogu and Yu Dianfan (Office of Scientific Research Administration,Shanghai University of Finance and Economics; School of International Business Administration; Top500 Enterprises Research Center), An Empirical Study on the Effects of Industrial Structure on Economic Growth and Fluctuations in China, Economic Research Journal,
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