China’s economic slowdown is taking a toll on the performance and prospects of its corporate sector, especially in the financial and property industries, which are facing a liquidity crunch and regulatory tightening. The second-quarter earnings season, which will wrap up this week, has revealed poor results and downbeat forecasts from many companies with heavy exposure to the struggling real estate market.
According to Goldman Sachs, earnings per share growth for Chinese companies is expected to slow down to 11 per cent in 2023, from 14 per cent in the previous estimate. The bank also lowered its forecast for China’s GDP growth to 8.3 per cent in 2023, from 8.6 per cent, citing weaker consumption, investment and exports.
The financial sector, which accounts for about a third of the MSCI China stock index, has been hit hard by the liquidity crisis among property developers and shaky local government finances. Many banks have reported lower net interest margins, higher provisions for bad loans and lower fee income in the second quarter. Industrial and Commercial Bank of China, the country’s biggest by assets, reported a 3.4 per cent drop in net profit year on year, while China Construction Bank saw a 2.8 per cent decline.
The property sector, which contributes about a quarter of China’s GDP, has also suffered from tighter credit conditions and regulatory curbs on debt and speculation. Many developers have reported lower sales, higher debt ratios and lower cash flows in the second quarter. Evergrande, China’s largest developer by sales, reported a 29 per cent plunge in net profit year on year, while its debt ratio rose to 186 per cent, well above the regulatory limit of 100 per cent.
Consumer and technology sectors fare better amid reopening
Not all sectors have been equally affected by China’s economic slowdown. Some have benefited more from the reopening of the economy after strict coronavirus restrictions were lifted earlier this year. The consumer and technology sectors, which account for about a quarter of the MSCI China stock index each, have reported mostly positive results and outlooks in the second quarter.
The consumer sector, which includes retail, tourism and entertainment industries, has seen a rebound in demand as people resumed spending on discretionary items and services. Many consumer companies have reported higher sales, margins and profits in the second quarter. Nike, the US sportswear giant, reported a 17 per cent increase in revenue from Greater China year on year, while Kweichow Moutai, China’s largest liquor maker, saw a 23 per cent rise in net profit.
The technology sector, which includes internet, e-commerce and gaming industries, has also enjoyed strong growth as more people shifted to online platforms for shopping, entertainment and education. Many technology companies have reported higher user numbers, revenues and profits in the second quarter. Alibaba, China’s largest e-commerce company, reported a 34 per cent increase in revenue year on year, while Tencent, China’s largest gaming company, saw a 20 per cent rise in net profit.
Outlook remains uncertain amid policy and geopolitical risks
Despite the divergence in performance among different sectors, the overall outlook for China’s corporate sector remains uncertain amid policy and geopolitical risks. The Chinese authorities have been pursuing a dual-track strategy of supporting economic recovery while containing financial risks and social imbalances. This has led to a mix of stimulus measures and regulatory tightening that have created volatility and confusion for businesses and investors.
On one hand, the Chinese authorities have taken steps to boost investor confidence in the country’s lagging stock market. On Sunday, they halved the stamp duty levied on stock transactions to 0.05 per cent and pledged to slow the pace of initial public offerings in Shanghai and Shenzhen, which can drain liquidity from the broader market and weigh on share prices. These moves spurred gains of as much as 5.5 per cent for the CSI 300 index of Shanghai- and Shenzhen-listed stocks on Monday.
On the other hand, the Chinese authorities have also intensified their crackdown on various sectors that they deem to pose risks or challenges to their social and political goals. These include property developers that are saddled with excessive debt; technology companies that are accused of monopolistic practices or data security breaches; education companies that are banned from making profits or raising capital; and gaming companies that are blamed for causing addiction or social problems among young people. These actions have triggered sell-offs and uncertainty for many companies and investors.
In addition to policy risks, China’s corporate sector also faces geopolitical risks as tensions with the US and other countries escalate over trade, technology and human rights issues. The US has imposed sanctions and restrictions on several Chinese companies over alleged links to military or security activities or violations of human rights or international norms. These include Huawei, China’s largest telecom equipment maker; Xiaomi, China’s largest smartphone maker; SMIC, China’s largest chip maker; Hikvision, China’s largest surveillance camera maker; and Ant Group, China’s largest fintech company.
