More than 4,800 Chinese companies listed in Shanghai, Shenzhen and Beijing posted a decline in net profit as the zero-Covid policy and a real estate crisis take a toll on the country’s listed companies.
Chinese company profits are collapsing like 2020 again and are suffering one of its worst earnings recessions on record, reported CNN.
As per the now released earnings for the first half of the year, it is a bloodbath. As many as 53 per cent posted a decline in net profit, according to data from Wind and Choice, two major financial information services in the country.
China’s most prominent tech companies are among those suffering. The second quarter marked an end to years of explosive growth with Alibaba (BABA) reporting flat revenue for the April-to-June period. Tencent (TCEHY) posted its first quarterly sales decline.
For some other sectors of the economy, this year has already been the worst on record.
Three of China’s biggest airlines — Air China (AIRYY), China Southern Airlines (ZNH), and China Eastern Airlines (CEA) — posted record losses, with a combined loss of 50 billion yuan (USD 7.2 billion) for the first half. They all blamed travel disruptions because of Covid curbs and a depreciating yuan, which has plunged 9 per cent against the US dollar this year, reported CNN.
A weaker currency hurts China’s airline industry because it has to pay for imported aircraft, parts and fuel in dollars. The costs of servicing dollar-denominated debt also increase.
Property developers are also among the worst performers so far this year, as the country’s housing market has spiralled downward.
The sector, which accounts for as much as 30 per cent of its GDP, has been crippled by a government campaign since 2020 to rein in reckless borrowing in the industry. Property prices have been falling, as have sales of new homes, reported CNN.
The crisis escalated in recent months, as thousands of disgruntled homebuyers threatened to stop paying their mortgages on unfinished homes, jolting markets and prompting businesses and authorities to take action to defuse the crisis.
Country Garden, China’s No 1 developer by sales, reported a 96 per cent plunge in net profit in the first half, the most since its 2007 listing in Hong Kong.
The company said it has been weighed down by “forces beyond our control such as the resurgence of the pandemic in various parts of mainland China and extreme weather, coupled with the downturn in the property sector.”
That was almost as bad as 2020 when companies posted their worst earnings season on record as the country came to a near standstill during the initial coronavirus outbreak. Back then, 54 per cent of listed companies saw their profit drop in the first six months, reported CNN.
The number of companies reporting a loss hit a record high of nearly 900 in the first half. In 2020, about 780 lost money.
Earnings crashes in the world’s second-largest economy can ripple around the world as Chinese companies are big buyers of commodities, technology and other products on the global market, reported CNN.
“We’ve already seen the impact,” said Alicia Garcia Herrero, chief economist for the Asia Pacific at Natixis, a French investment bank. Prices of oil and other energy commodities have retreated and semiconductor factories have started to see decelerating orders, she added.
Experts blamed China’s strict Covid curbs and a deepening crisis in the property market for the dismal performance of companies.
“The key reasons are mobility restrictions and a huge drop in sentiment associated with the demise of the real estate market,” said Garcia-Herrero.
Larry Hu, chief China economist for Macquarie Group, said the poor earnings reflected China’s slowing economy, which was being dragged back by the real estate slump, the worsening Covid situation, and the weakening global economy, reported CNN.
China has so far stuck with its zero-Covid policy, which often leads to strict restrictions on people’s movement and snap lockdowns of cities over a few cases. Travel to and from China is also limited.
Shanghai, the country’s financial hub of 25 million people, was placed under a two-month lockdown earlier this year. Since then, many other key cities have also tightened curbs on residents and businesses. On Thursday, Chengdu, a city in southwestern Sichuan province, locked down its 21 million residents following a spike in Covid cases.
China’s GDP expanded by just 0.4 per cent in the second quarter from a year ago, the weakest performance since the start of 2020. Last month, several major investment banks slashed their forecasts for China’s annual economic growth to 3 per cent or less.
Analysts are also concerned about a record heat wave that has swept across southern China recently, which had caused some provinces to shut factories to save power.
“Whether Beijing decides to start easing (zero-Covid policy) from March 2023, we expect the economy and markets to experience a difficult period, as people will be either disappointed about no real opening or be overwhelmed by a surging Covid infection,” said Nomura analysts in a research report on Friday.