What's ailing Chinese profits, and where to find growth?

US$5tn GDP has been added to the Chinese economy in the post-Covid era, but Chinese stocks have failed to fully convert realized macro growth into equity returns, underperforming global equities by 110pp since 2020 on underwhelming profit delivery (6% EPS CAGR since 2021). Low inflation, abundant capacity, and intense competition are well-telegraphed reasons for subdued earnings growth and corporate profitability (i.e. Chinese profit involution). But, in our view, those profit inhibitors may stem from and reflect other deeper economic, policy, and social factors that have suppressed the cost of capital for Chinese corporates, and altered their optimal capital budgeting decisions and profit-maximization behaviors. Hence, investors need to systematically analyze Chinese earnings by taking into account China's unique profit drivers and constraints, thereby framing their views on normal profit, fair valuation, risk/reward, and investment strategy accordingly. Our clustering analysis enable