After a prolonged period of financial turbulence, corporate earnings in China showed a modest recovery in the third quarter of 2024. Profits of companies listed on China’s domestic stock markets increased by 3.7% year-on-year, reversing declines seen in the prior two quarters, according to a recent analysis by China Merchants Securities Co. However, a closer examination of the data reveals a less optimistic reality. The limited growth in overall earnings was driven primarily by financial firms benefiting from a stock market rally, while sectors relying on consumer demand and other non-financial industries continued to grapple with declining profits.
As China navigates a critical juncture in its economic trajectory, analysts emphasize the need for decisive policy interventions that address underlying structural issues. The National People’s Congress (NPC) Standing Committee meeting, which concludes this Friday, has heightened expectations for a fiscal stimulus package to boost domestic demand, a crucial step for sustaining economic momentum in the coming months.
China’s domestic stock market saw an impressive rally beginning in late September, fueled by liquidity injections from the People’s Bank of China (PBOC). The CSI 300 Index, a key onshore benchmark, surged nearly 35% from a September low through early October. This market rally enabled financial firms—especially insurance and brokerage firms—to post significant gains. China Merchants Securities reported that earnings for insurance companies and brokers skyrocketed by 233% compared to the previous year. However, despite the strong gains in the financial sector, earnings in non-financial sectors slipped by 9%, an accelerated decline from the previous quarter’s 7% drop.
The disparity between financial and non-financial performance underscores the uneven nature of China’s economic recovery. While financial companies capitalized on stock market gains, sectors heavily dependent on consumer spending, such as real estate, retail, and discretionary goods, have continued to suffer. Leading property developer China Vanke Co., for example, reported another large quarterly loss, while renowned liquor producer Kweichow Moutai Co. failed to meet earnings expectations, highlighting the ongoing strain on consumer-oriented sectors.
“The stimulus blitz at the end of September has provided limited support for China’s earnings, and any impact will be reflected in fourth-quarter results at the soonest,” said Shen Meng, director at Chanson & Co., emphasizing the need for broader measures. “The policies, which focus more on providing liquidity, won’t be able to help companies improve their earnings unless Beijing rolls out measures to tackle structural economic issues.”
With earnings season nearly wrapped up, many of China’s leading onshore companies have published their quarterly results, revealing a mixed performance across sectors. According to UBS Securities, non-financial earnings dropped significantly, dampening hopes for a robust economic revival. While some financial giants posted gains, thanks in part to lower provision charges and the equity market boost, companies outside the financial sector are still feeling the pinch of weak domestic demand.
The modest improvement in corporate profits has not been enough to reverse the earnings declines experienced throughout the year. Analysts suggest that any recovery will likely be gradual, as policies announced at the end of the third quarter take time to permeate the broader economy. UBS Securities strategist Lei Meng expects the third quarter to be the low point, forecasting an earnings rebound in the coming quarters as favorable policies take effect. Forward earnings per share estimates for CSI 300 Index members have recently seen a slight upward revision of 1.3%, marking the first monthly upgrade in over a year, according to Bloomberg data.
Despite these positive signals, many companies missed their earnings targets. Homin Lee, a senior macro strategist at Lombard Odier, highlighted that roughly 60% of onshore-listed firms failed to meet consensus estimates for the quarter. Lee noted that remaining reports from offshore-listed companies could influence overall market sentiment, either reinforcing optimism or compounding concerns about China’s economic prospects.
The consumer sector’s ongoing struggles in China continue to be a cause for concern. Major players in real estate, retail, and discretionary spending have reported underwhelming third-quarter results, as consumer confidence remains fragile amid slow wage growth and rising inflation. One of the hardest-hit sectors, real estate, has continued to lag despite government efforts to stabilize the market. Property developer China Vanke Co. recorded another quarterly loss, underscoring the challenges faced by developers as they contend with weak demand and high debt levels.
Meanwhile, Chinese consumer goods giants also posted lackluster results. Kweichow Moutai Co., China’s leading liquor brand, fell short of market expectations, reflecting the pressures facing consumer-focused companies amid sluggish demand. Appliance manufacturer Midea Group Co. managed to meet earnings expectations but relied on substantial foreign exchange gains rather than strong domestic sales to achieve this outcome.
The disappointing results from consumer-dependent industries reflect broader trends in China’s economy, where domestic demand has struggled to keep pace with supply, exacerbated by structural challenges that government stimulus alone may not fully resolve.
Beyond domestic issues, China’s corporate earnings are also subject to volatile external factors, including global economic uncertainties and U.S.-China trade tensions. The upcoming U.S. presidential election adds an additional layer of unpredictability, as Sino-American relations have remained strained, particularly in sectors such as technology and semiconductors. Analysts expect chipmakers and tech firms to continue facing headwinds, regardless of the election’s outcome, as trade policies and regulatory scrutiny remain key concerns.
Adding to the complexities, the CSI 300 Index’s early October rally quickly reversed course, with the index falling more than 7% since its peak. This volatility reflects investor caution and uncertainty regarding the long-term effectiveness of China’s recent economic policies. The PBOC’s interest-rate cuts and liquidity support provided a temporary boost to equities, but market participants remain skeptical about the sustainability of these gains in the absence of concrete improvements in domestic demand.
Xin-Yao Ng, an investment manager of Asian equities at abrdn plc, believes that the weakness in earnings will likely continue into the fourth quarter, with most sectors unlikely to see immediate benefits from recent policy measures. “The weakness in earnings will likely stretch into the next quarter with most sectors not seeing an immediate uplift from policies,” Ng commented, stressing that fiscal policy alone may not be sufficient to spark a sustained earnings recovery.
Investors are now focused on the NPC Standing Committee meeting, where hopes are high for a comprehensive fiscal package to be approved. Many analysts argue that such a package is essential to reviving domestic demand and supporting struggling industries, especially given the uneven impact of previous measures. A disappointing outcome from the NPC meeting, however, could delay any potential earnings turnaround and stall momentum in the stock market.
Given the continued reliance on financial sector gains and the overall weakness in consumer-driven industries, the pressure is on China’s top leaders to implement measures that address the underlying economic issues. Structural challenges, such as high household debt, sluggish wage growth, and shifting demographics, have dampened consumer spending and compounded the difficulties faced by non-financial firms.
“While hopes are that the NPC Standing Committee meeting, which concludes Friday, will sign off on a decent-sized fiscal package, a disappointing outcome may delay the earnings recovery and further cool the stock market rally,” observed an analyst from China Merchants Securities.
While some analysts maintain cautious optimism for a gradual recovery in corporate earnings, the path ahead remains challenging. For China to achieve a sustained earnings rebound, many argue that policymakers must prioritize structural reforms alongside fiscal stimulus. Addressing weak domestic demand, for example, will require policies that support household income growth, reduce income inequality, and stabilize housing markets.
The modest earnings recovery in the third quarter has shown that while financial policies can provide a temporary boost, they do not offer a lasting solution to China’s economic challenges. As Beijing weighs its options, the urgency for comprehensive reforms is becoming increasingly clear.
UBS Securities strategist Lei Meng forecasts that it will take three to six months for the impact of recent policies to materialize fully, emphasizing the importance of long-term strategies to drive a robust recovery. “We expect the third quarter to mark an earnings trough as it takes three to six months for favorable policies to take effect,” Meng said, noting that forward earnings estimates for major Chinese companies have shown a slight upward revision.
