New York, October 26 (Reuters/ PRNewswire ) – Egan-Jones released an analysis exploring why since 2004 China's economic growth has far surpassed that of the United States, yet its stock market returns are less than half of those in the U.S. The commentary also raises a question: Could artificial intelligence ( AI ) have a similar squeezing effect on U.S. equity returns as well?
Calculated in US dollars, whether adjusted for inflation or local prices, China's economic growth between 2004 and 2025 was at least twice that of the United States. During the same period, the returns from iShares China Large - Cap ETF ( FXI ) were less than half of the overall US market returns, and this is after taking into account dividends. Today, investors are paying only slightly more than one-third of what they would for US returns in order to obtain returns on Chinese blue-chip stocks.
Egan-Jones attributes this gap to competition. Chinese companies have always pursued market share rather than profit, especially in emerging industries such as electric vehicles and food delivery, where dozens of well-funded competitors continuously squeeze profits thin. Chinese officials refer to this outcome as “involution,” which is a situation where every company strives harder, yet no one truly emerges victorious. Egan-Jones states that Chinese companies’ profitability is below their capital costs, whereas American companies’ profitability exceeds their capital costs.
The automotive manufacturing industry is the best example of this pattern. The profit margins in this industry have been declining year by year since 2017, and by 2025, they had almost halved; among Chinese electric vehicle manufacturers, only BYD, Xiaomi, and Leapmotor are making a profit. Egan-Jones compares this industry to the American automotive industry around 1910: at that time, the number of American automobile manufacturers continued to decrease over the following thirty years, and ultimately, General Motors, Ford, and Chrysler together accounted for more than 80% of production.
These profits have not disappeared. After 2000, wages in Chinese cities have doubled, while price wars have given most of the remaining benefits to consumers, leaving shareholders in the last position. The lower valuations also reflect market concerns that geopolitical tensions could deprive investors of their holdings in Chinese assets.
Egan-Jones also considers whether AI will create a similar dynamic in the United States. The institution points out that the decline in AI's cost of capacity, the sell-off of software stocks at the beginning of 2026, and the heavy capital expenditures by large technology companies are all relevant signs. If AI leads to more industries in the United States becoming a competition among many capable competitors, Egan-Jones believes that most of the benefits will go to customers, and it will be more difficult to maintain the premium valuation of U.S. stocks.
Regarding Egan - Jones Ratings
Egan-Jones is a NRSRO established in 1995, providing timely and accurate credit rating and agency services.
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