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Chinese corporate profits are set to show a third straight year of decline in 2024, with the trend expected to continue this year as deflationary pressures weigh on the world’s second-largest economy.
Corporate profits in China for companies with more than 20 million Rmb ($2.7 million) in revenue fell by an average of 4.7 percent year-on-year between January and November, according to the latest data from the National Bureau of Statistics. This is greater than the 4 percent decline seen throughout 2022 when the country was under pandemic lockdown.
Revenues rose just 1.8 percent year-on-year between January and November 2024 over the same period in 2023. That compares with growth of 5.9 percent in 2022 compared to last year.
Additionally, 25 percent of companies in China with revenue of more than 20 million renminbi made full losses between January and November 2024, compared with 16 percent in the full year of 2019 before the pandemic, the data showed. NBS. The agency’s data covers 500,000 companies.
“The biggest reason behind this slowdown, I would say, is deflation,” said Laura Wang, chief China equity strategist at Morgan Stanley.
Fourth-quarter GDP numbers on Friday will show whether the country met an official economic growth target of about 5 percent in 2024, amid concerns about a stagnant economy and low consumer confidence.
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China is grappling with a two-speed economy, with strong exports offsetting weak domestic demand as households face a deep decline in holdings.
Official data on Monday showed stronger-than-expected growth in trade last month. Exports rose 10.7 percent in December year-on-year in dollar terms, while imports rose 1 percent, beating average analysts’ forecasts from Reuters for a 7.3 percent rise and 1.5 percent decline, respectively.
In November, exports increased by 6.7 percent year-on-year, while imports contracted by 3.9 percent.
The data came just a week before Donald Trump is scheduled to take office in the US with promises to sharply raise tariffs on Chinese goods. China’s trade surplus with the US rose 6.9 percent in 2024 from a year earlier to $361.03 billion, Chinese customs figures showed.
But China’s growing trade surplus has not been enough to offset oversupply among manufacturers, leading to fierce competition that is eroding prices for their goods and hitting profits.
The NBS has reported 28 months of output price deflation – the price at which factories sell their goods – with economists predicting the trend to continue this year.
“Corporate profitability is weakening amid prolonged PPI deflation,” Citi analysts said in a note. “Slow final demand and over-competition can only reduce profitability, weighing on private investment decisions.”
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China’s giant state-owned enterprises were the worst performers in NBS corporate earnings data, despite being heavily promoted by 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 dragged by the government in performing various social or geopolitical roles, from stock buybacks to supporting Xi’s Belt and Road Initiative international infrastructure program – was a burden for fiscal resources, analysts said.
“With the current rate of decline, I don’t think they can sustain for many (more) years this kind of policy,” said Lixin Colin Xu, former chief economist at the World Bank’s Development Research Group and an expert on Chinese companies. .
Data from the China Association of Public Companies shows that of 5,368 listed companies in mainland China, 23 percent reported a year-on-year net loss in the first nine months of 2024, while 40 percent reported declining profits and 45 percent had a decrease in income.
Morgan Stanley’s Wang said she expected 5 percent year-on-year profit growth in 2025 from companies in the MSCI China index, the benchmark followed by international investors, compared with 7 percent a year earlier.
In a deflationary environment in which revenue growth was harder to come by, companies should pay more attention to returning investors through mechanisms such as share buybacks and dividends, she said.
Previously, companies had focused more on reinvestment to capture growth opportunities. “For so much of the last 20 to 30 years, they’ve all grown up and operated under that mentality,” Wang said. “Now they have to change it.”
