China’s corporate profits fell for a third year

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China’s corporate profits are expected to decline for the third year in a row in 2024, a trend that is expected to continue this year amid inflationary pressures on the world’s second-largest economy.

Corporate profits in China for companies with revenue above Rmb20mn ($2.7mn) fell an average of 4.7 percent year-on-year between January and November, according to the latest data from the National Bureau of Statistics. That’s more than the 4 percent decline seen in 2022 when the country was in lockdown.

During the same period in January and November 2024, revenue in 2023 grew by just 1.8 percent per year. This compares to 5.9 percent growth in 2022 last year.

In addition, 25% of companies in China with revenue above Rmb20mn reported direct losses between January and November 2024, compared to 2018 before the outbreak. The agency’s data includes 500,000 companies.

“The biggest factor behind that slowdown, I would say. Deflationsaid Laura Wang, China equity strategist at Morgan Stanley.

Fourth-quarter GDP numbers on Friday showed the country has reached its official economic growth target of 5 percent in 2024.

China is reeling from a two-speed economy, with strong exports offsetting weak domestic demand as households cope with sharp asset losses.

On Monday, official data showed that last month’s business growth was stronger than expected. Exports rose 10.7 percent in December in dollar terms, while imports rose 1 percent, compared with an average of analysts polled by Reuters for a 7.3 percent increase and a 1.5 percent decline.

In November, exports rose 6.7 percent year-on-year, while imports fell 3.9 percent.

The information comes a week before Donald Trump is set to take office in the United States. He promised to increase the tariff. On Chinese goods. China’s trade with the US is expected to grow 6.9 percent to $361.03 billion in 2024 compared to last year, according to China Customs figures.

But China’s growing trade surplus is not enough to compensate for the oversupply among manufacturers, which is causing intense competition that is hurting the prices of their goods and affecting profitability.

NBS reported 28 months of producer price inflation – The price at which factories sell their goods – economists predicting the trend to continue this year.

“The company’s profitability is wearing thin amid long-term PI deflation,” Citi analysts said in a note. “Cold end demand and excessive competition can reduce profitability by weighing on individual investment decisions.”

China’s giant state-owned enterprises performed very well in NBS corporate profit data despite heavy promotions by President Xi Jinping’s government.

Their profits fell 8.4 percent year-over-year in the January-November period, compared with 1 percent or less for private or foreign companies that performed best in the group.

The weakening performance of state-owned enterprises – often pulled by various social or geopolitical roles played by the government, from stock buybacks to support for Xi’s Belt and Road Initiative global infrastructure program – has put pressure on budget resources, analysts said.

“At the current rate of recession, I don’t think such policies can be sustained for many (more) years,” said Lixin Colin Xu, a leading economist and expert on Chinese companies at the World Bank’s development research group.

Data from the China Association of Public Companies showed that 23 percent of the 5,368 companies listed in mainland China reported annual net losses in the first nine months of 2024, while 40 percent saw a decline in profits and 45 percent in revenue.

Morgan Stanley’s Wang said it expects 5 percent profit growth by 2025 for companies in the MSCI China Index, a benchmark followed by global investors, up from 7 percent a year ago.

He said companies should pay more attention to investor returns and dividends in the face of declining prices, where earnings growth is difficult to achieve.

In the past, companies focused more on reinvesting to capture growth opportunities. “For the past 20 or 30 years, everyone has been growing and working with that mindset,” Wang said. “Now they have to change that.”