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Chinese corporate profits are set to show a third straight year of decline in 2024, and the trend is expected to continue this year as deflationary pressures weigh on the world's second-largest economy.
Corporate profits in China for companies with revenues of more than RMB20 million ($2.7 million) fell by an average of 4.7 percent year-on-year between January and November, according to the latest data from the National Bureau of Statistics. This is larger than the 4 percent decline seen during all of 2022 when the country was under pandemic lockdowns.
Revenue grew just 1.8 percent year-on-year between January and November 2024 compared to the same period in 2023. This compares to 5.9 percent growth in 2022 from the previous year.
In addition, data from the National Bureau of Statistics showed that 25 percent of companies in China with revenues of more than RMB 20 million incurred outright losses between January and November 2024, compared to 16 percent in all of 2019 before. The epidemic. The agency's data covers 500,000 companies.
“I would say the biggest reason behind this slowdown is… deflationLaura Wang, chief China equity strategist at Morgan Stanley, said:
Fourth-quarter GDP figures on Friday will show whether the country has reached the official economic growth target of around 5 percent in 2024 amid concerns about a stagnating economy and falling consumer confidence.
China faces a two-speed economy, with strong exports offsetting weak domestic demand while households deal with a deep real estate slump.
Official data on Monday showed stronger-than-expected growth in trade last month. Exports rose 10.7 percent in December year-on-year in dollar terms, while imports rose 1 percent, exceeding Reuters analysts' average expectations of a rise of 7.3 percent and a decline of 1.5 percent, respectively.
In November, exports rose by 6.7 percent year-on-year, while imports contracted by 3.9 percent.
These data came just one week before Donald Trump was scheduled to take office in the United States Promises to raise tariffs sharply On Chinese goods. Chinese customs figures showed that China's trade surplus with the United States rose by 6.9 percent in 2024 compared to the previous year to $361.03 billion.
But China's growing trade surplus was not enough to compensate for the excess supply among manufacturers, which led to intense competition that undermined the prices of its goods and hit profits.
According to the National Statistics Authority 28 months of producer price deflation – The price at which factories sell their goods – and economists expect this trend to continue this year.
“Corporate profitability is diminishing amid prolonged contraction in the producer price index,” Citi analysts said in a note. “Slowing final demand and excessive competition will only lead to lower profitability, affecting private investment decisions.”
China's state-owned giants were the worst performers in corporate earnings data released by the National Bureau of Statistics, despite being heavily promoted by President Xi Jinping's government.
Its profits fell by 8.4 per cent year-on-year between January and November, compared to 1 per cent or less for private or foreign companies, the best performers in the group.
Analysts said the poor performance of state-owned enterprises – which are often forced by the government to perform various social or geopolitical roles, from buying shares to supporting Xi's Belt and Road Initiative international infrastructure program – was a strain on finances.
“At the current rate of decline, I don’t think they can sustain this kind of policy for many years,” said Lixin Colin Xu, a former chief economist at the World Bank’s Development Research Group and an expert on Chinese companies.
Data from the China Association of Public Enterprises show that among 5,368 companies listed in mainland China, 23 percent reported a year-on-year net loss in the first nine months of 2024, while 40 percent reported lower profits and 45 percent reported lower revenues.
Morgan Stanley's Wang said she expects earnings to grow 5 percent year-on-year in 2025 from companies included in the MSCI China Index, the index followed by international investors, compared with 7 percent a year earlier.
In a deflationary environment where revenue growth is difficult to achieve, companies will need to pay more attention to investor returns through mechanisms such as share buybacks and dividends, she said.
Previously, companies focused more on reinvestment to seize growth opportunities. “Over the past 20 to 30 years, they have all been growing and operating under this mindset,” Wang said. “Now they need to change that.”
