Corporate profits in China are expected to decline for the third year

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Chinese corporate profits are expected to post 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 revenues of more than RMB 20 million (US$2.7 million) 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 shows. This is more than the 4 percent decline in all of 2022, when the country was under pandemic lockdowns.

Sales increased just 1.8 percent year-on-year between January and November 2024 compared to the same period in 2023. In comparison, growth in 2022 was 5.9 percent compared to the previous year.

Furthermore, 25 percent of companies in China with revenues of more than Rmb20 million made complete losses between January and November 2024, compared to 16 percent in full-year 2019 before the pandemic, NBS data showed. The agency’s data covers 500,000 companies.

“I would say the main reason for this slowdown is deflationsaid Laura Wang, chief China equity strategist at Morgan Stanley.

Fourth-quarter GDP figures on Friday will show whether the country has met its official economic growth target of about 5 percent in 2024 amid concerns about a stagnating economy and low consumer confidence.

China is grappling with a two-speed economy, with strong exports offsetting weak domestic demand while households grapple with a deep housing slump.

Official data on Monday showed stronger-than-expected trade growth last month. Exports rose 10.7 percent year-on-year in dollar terms in December, while imports rose 1 percent, beating average analyst forecasts from Reuters of a 7.3 percent rise and a 1.5 percent decline, respectively.

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

The data came just a week before Donald Trump is scheduled to take office in the United States promises a drastic increase in tariffs on Chinese goods. China’s trade surplus with the US rose 6.9 percent to $361.03 billion in 2024 compared to the previous year, Chinese customs figures showed.

But China’s growing trade surplus was not enough to offset the oversupply among manufacturers, leading to intense competition that eroded prices for their goods and cut into profits.

The NBS reported 28 months of producer price deflation – the price at which factories sell their goods – with economists predicting that trend will continue this year.

“Corporate profitability is weakening amid ongoing PPI deflation,” Citi analysts said in a note. “Sluggish final demand and excessive competition could only lead to a decline in profitability and weigh on private investment decisions.”

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 companies in the group.

The weak performance of state-owned companies – which are often pushed by the government to take on various social or geopolitical roles, from buying stocks to supporting Xi’s Belt and Road Initiative international infrastructure program – is putting a strain on budget resources, analysts said .

“I don’t think they can sustain this kind of policy for many years at the current downward pace,” said Lixin Colin Xu, a former senior economist at the World Bank’s Development Research Group and an expert on Chinese companies.

Data from the China Association for 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 falling profits and 45 percent reported falling revenue.

Morgan Stanley’s Wang said she expects 5 percent year-on-year earnings growth in 2025 from companies in the MSCI China index, the benchmark for international investors, compared with 7 percent last year.

In a deflationary environment where revenue growth is harder to achieve, companies need to pay more attention to investor returns through mechanisms such as share buybacks and dividends, she said.

Previously, companies had focused more on reinvestment to capture growth opportunities. “Over the last 20 to 30 years, they have all grown and operated with this mindset,” Wang said. “Now they have to change that.”