Are you ready to gain valuable insights into the Chinese business and finance world? Sign up for free updates from myFT Digest to have relevant information delivered straight to your inbox. Chinese corporate profits have been on a downward trend for the past few years, and the challenges are expected to persist in the near future due to deflationary pressures impacting the country’s economy.
Here are some key points to consider regarding Chinese corporate profits:
- Chinese companies with over Rmb20mn in revenue experienced a 4.7% decline in profits year on year from January to November, exceeding the 4% drop seen in 2022 during pandemic lockdowns.
- Revenue growth was minimal at just 1.8% year on year from January to November in 2024, a considerable drop from the 5.9% growth seen in 2022.
- Notably, 25% of companies with revenue exceeding Rmb20mn reported losses from January to November in 2024, compared to 16% in 2019 before the pandemic.
- Analysts attribute the profit slowdown to deflation, with concerns looming over achieving the official economic growth target of about 5% in 2024 amidst a stagnant economy and low consumer confidence.
In addition to the challenges faced by Chinese companies, the country is contending with a two-speed economy characterized by:
- Strong exports that counterbalance weak domestic demand due to a significant property slump.
- Recent trade data showing an unexpected increase in exports by 10.7% and a 1% rise in imports in December, exceeding projected forecasts.
- The growing trade surplus with the US reaching $361.03bn in 2024 may not be enough to offset oversupply among manufacturers facing intense competition and declining prices.
- Continuous producer price deflation and a downward trend in corporate profitability pose challenges for private investments in China.
State-owned enterprises in China, despite government backing, have struggled with an 8.4% decline in profits compared to private or foreign companies. This decline is straining fiscal resources and has implications for the overall economic trajectory of the country.
Looking ahead, analysts predict a 5% profit growth in 2025 for companies in the MSCI China index, necessitating a shift towards a focus on investor returns through strategies like share buybacks and dividends. This marks a departure from the growth-centric mindset that has prevailed for decades among Chinese businesses.
In conclusion, navigating the complex landscape of Chinese corporate profitability requires adaptability, strategic decision-making, and a keen focus on investor returns to weather the deflationary pressures and economic challenges ahead. It is crucial for companies to embrace change and innovate to thrive in a rapidly evolving market environment.
