Stay informed with free updates
Just register China Business and Finance myFT Digest – delivered straight to your inbox.
Chinese corporate profits are expected to fall for a third consecutive year in 2024, a trend expected to continue into this year as the world’s second-largest economy faces deflationary pressures.
According to the latest data from the National Bureau of Statistics, profits of Chinese companies with revenue of more than 20 million yuan ($2.7 million) fell by an average of 4.7% from January to November compared with the same period last year. That’s a bigger drop than the 4% drop the country experienced in all of 2022 due to the pandemic lockdown.
From January to November 2024, revenue in the same period in 2023 increased by 1.8% annually.
In addition, data from the National Bureau of Statistics show that between January and November 2024, 25% of Chinese companies with revenue of more than 20 million yuan suffered outright losses, compared with 16% for the whole of 2019 before the outbreak. %. The agency’s data covers 500,000 companies.
“I think the biggest reason behind the economic slowdown is deflation,” said Laura Wang, chief China equity strategist at Morgan Stanley.
Fourth-quarter GDP data due on Friday will show whether the country meets its official economic growth target of about 5% in 2024 amid concerns about economic stagnation and low consumer confidence.
Some content could not be loaded. Check your network connection or browser settings.
China is grappling with a two-speed economy, with strong exports offsetting weak domestic demand and households coping with a severe housing slump.
Official data on Monday showed trade growth last month was stronger than expected. In U.S. dollar terms, exports increased by 10.7% year-on-year in December and imports increased by 1%, exceeding the average forecast of Reuters analysts for a growth of 7.3% and a decrease of 1.5% respectively.
In November, exports increased by 6.7% compared with the same period last year, while imports fell by 3.9%.
The data comes a week before Donald Trump is scheduled to take office in the United States and pledges to significantly increase tariffs on Chinese goods. Chinese customs data show that China’s trade surplus with the United States will increase by 6.9% annually in 2024, reaching US$361.03 billion.
Analysts at Barclays said the double-digit export growth showed that Chinese manufacturers were “pushing forward” shipments to get ahead of possible tariffs imposed by Trump.
But China’s growing trade surplus is not enough to offset oversupply among manufacturers, leading to fierce competition that drives down the price of its goods and hits profits.
The Office for National Statistics reported 28 consecutive months of deflation in producer prices – the prices at which factories sell products – and economists predict the trend will continue this year.
“Corporate profitability is weakening amid prolonged PPI deflation,” Citi analysts said in a note. “Weak end demand and excessive competition will only lead to lower profitability, affecting private investment decisions. ”
Some content could not be loaded. Check your network connection or browser settings.
Despite a strong push from President Xi Jinping’s government, China’s large state-owned enterprises performed the worst in National Bureau of Statistics corporate profit data.
Their profits fell 8.4% year-on-year between January and November, while the best-performing private or foreign companies in the group saw profits fall 1% or less.
Analysts say weak performance from state-owned enterprises, which are often forced by governments to take on a variety of social or geopolitical roles, ranging from buying stocks to supporting Xi Jinping’s Belt and Road international infrastructure plan, has put a strain on financial resources.
“At the current rate of decline, I don’t think they can sustain it for many years. [more] Xu Lixin, former chief economist of the World Bank’s Development Research Group and an expert on Chinese corporate issues, said that this kind of policy has been implemented for many years.
Data from the China Association of Public Companies shows that among the 5,368 listed companies in mainland China, 23% of the companies experienced annual net losses in the first nine months of 2024, 40% of the companies experienced a decline in profits, and 45% of the companies experienced a decline in revenue.
Morgan Stanley’s Wang said she expected corporate profits in the MSCI China index, the benchmark followed by international investors, to rise 5% annually in 2025, compared with 7% a year earlier.
She said that in a deflationary environment where revenue growth is more difficult to achieve, companies need to pay more attention to investor returns through mechanisms such as stock buybacks and dividends.
Previously, companies focused more on reinvestment to capture growth opportunities. “They have grown and operated under this mentality for most of the past 20 to 30 years,” Wang said. “Now they need to change that.”
Additional reporting by Arjun Neil Alim in Shanghai
