Stay informed with free updates
Simply register at Chinese business and finance myFT Digest – delivered straight to your inbox.
Chinese corporate profits are expected to post a third straight year of decline in 2024, and that trend is expected to continue this year as deflationary pressures weigh on the world’s second-largest economy.
In China, profits of companies with revenue above 20 million yuan ($2.7 million) fell an average of 4.7 percent year-on-year between January and November, according to the latest data from the Chinese Bureau of Commerce. State of statistics. This is more than the 4% drop observed over the whole of 2022, when the country was subject to containment measures linked to the pandemic.
Revenues grew just 1.8 percent year-on-year between January and November 2024 compared to the same period in 2023. This compares to growth of 5.9 percent in 2022 compared to the year previous.
Additionally, 25% of Chinese companies with revenue above RMB 20 million suffered outright losses between January and November 2024, compared to 16% for the whole of 2019 before the pandemic, according to BES data. The agency’s data covers 500,000 companies.
“The main reason for this slowdown, I would say, is deflationsaid Laura Wang, chief China equity strategist at Morgan Stanley.
Fourth-quarter GDP figures will show on Friday whether the country has met its official economic growth target of around 5 percent in 2024, amid concerns about a stagnant economy and low consumer confidence.
China is struggling with a two-speed economy, with strong exports offsetting weak domestic demand as households face a deep housing crisis.
Official data released on Monday showed stronger-than-expected trade growth last month. Exports rose 10.7 percent in December from a year earlier in dollar terms, while imports rose 1 percent, beating Reuters analysts’ average forecast of a 7.3 percent rise and a drop of 1.5 percent, respectively.
In November, exports increased by 6.7 percent year-on-year, while imports fell by 3.9 percent.
The data came just a week before Donald Trump took office in the United States. promises to sharply increase prices on Chinese products. China’s trade surplus with the United States rose 6.9% in 2024 from the previous year to $361.03 billion, according to Chinese customs figures.
But China’s growing trade surplus was not enough to offset manufacturers’ oversupply, leading to intense competition that drove down the prices of their products and hit their profits.
The NBS reported 28 months of producer price deflation – the price at which factories sell their products – and economists predict this trend will continue this year.
“Corporate profitability is weakening amid prolonged PPI deflation,” Citi analysts said in a note. “Weak final demand and excessive competition could only lower profitability, which would weigh on private investment decisions. »
China’s giant state-owned enterprises were the worst performers in the BES corporate profits data, although they received a big boost from President Xi Jinping’s government.
Their profits fell 8.4 percent year-on-year between January and November, compared with 1 percent or less for private or foreign companies, the best performers in the group.
The weakening performance of state-owned enterprises – which are often forced by the government to play various social or geopolitical roles, from buying shares to supporting the international infrastructure program of the Belt and Road Initiative Xi Road – strained budgetary resources, analysts say.
“At the current rate of decline, I don’t think they can last for many years. [more] for years, this kind of policy,” said Lixin Colin Xu, former senior economist at the World Bank’s Development Research Group and an expert on Chinese business.
Data from the China Association of State-Owned Enterprises shows that out of 5,368 listed companies in mainland China, 23% reported a year-on-year net loss in the first nine months of 2024, while 40% reported a drop in their profits and 45% a drop in their revenue.
Morgan Stanley’s Wang said she expected 5% year-on-year profit growth in 2025 for companies in the MSCI China Index, the benchmark tracked by international investors, up from 7%. % a year ago.
In a deflationary environment where revenue growth is more difficult to achieve, companies should pay more attention to investor returns through mechanisms such as share buybacks and dividends, she said.
Previously, companies focused more on reinvestment to capture growth opportunities. “For much of the last 20 to 30 years, they all grew up and operated in that mindset,” Wang said. “Now they have to change that.”
