Chinese companies’ profits are collapsing as if 2020 is back

China is suffering one of its worst earnings recessions on record, as Beijing’s “zero Covid” policy and a housing crisis take a toll on the country’s listed companies.

More than 4,800 Chinese companies listed in Shanghai, Shenzhen and Beijing have already released their results for the first half of the year. It was a bloodbath.

About 53% reported a drop in net income, according to data from Wind and Choice, the country’s two major financial information services. That was almost as bad as it was in 2020, when companies recorded their worst earnings season as the country nearly came to a halt during the initial coronavirus outbreak. At that time, 54% of listed companies saw their profit drop in the first six months.

In some ways, though, the beginning of this year was worse. The number of companies reporting losses hit a record high of nearly 900 in the first half. In 2020, around 780 lost money.

A drop in profits in the world’s second-largest economy could ripple around the world. That’s because Chinese companies are big buyers of commodities, technology and other products in the global market.

“We’ve already seen the impact,” said Alicia García Herrero, chief Asia-Pacific economist at Natixis, a French investment bank. Prices for oil and other energy commodities have retreated and semiconductor factories have started to see orders slow down, she added.

Experts blamed the strict restrictions imposed in China due to Covid-19 and the deepening crisis in the housing market for the dismal performance of companies.

“The main reasons are mobility restrictions and a huge drop in sentiment associated with the downturn in the housing market,” said García Herrero.

Larry Hu, chief China economist for the Macquarie Group, said the low earnings reflect the slowing Chinese economy, which is being dragged down by the housing crisis, the worsening Covid-19 situation and the weakening global economy.

So far, China has stuck to its Covid zero policy, which often leads to strict restrictions on the movement of people and instant city lockdowns in some cases. Travel to and from China is also limited.

Shanghai, the financial hub of the country of 25 million people, was placed under a two-month lockdown earlier this year. Since then, many other major cities have also restricted the movement of residents and businesses. On Thursday (1), Chengdu, a city in southwest Sichuan province, put its 21 million inhabitants on lockdown after a spike in Covid-19 cases.

China’s GDP grew by just 0.4% in the second quarter from a year earlier, the weakest performance since the start of 2020. Last month, several major investment banks lowered their forecasts for China’s annual economic growth to 3 % or less.

Analysts are also concerned about a record heat wave that swept through southern China recently, causing some provinces to close factories to save energy.

“If Beijing decides to start easing [a política de Covid zero] As of March 2023, we expect the economy and markets to go through a difficult period as people will either be disappointed that there is no real opening up or be overwhelmed by a growing Covid infection,” Nomura analysts said in a report. survey on Friday (2).

top losers

China’s most prominent tech companies are among those suffering. The second quarter marked the end of years of explosive growth, with Alibaba reporting steady revenue for the April-June period. Tencent recorded its first quarterly decline in sales.

For some other sectors of the economy, this year has been the worst on record.

Three of China’s biggest airlines – Air China, China Southern Airlines and China Eastern Airlines – posted record losses, with a combined loss of 50 billion yuan ($7.2 billion) in the first half. All blamed travel disruptions because of Covid restrictions and the devaluation of the yuan, which has fallen 9% against the US dollar this year.

A weaker currency hurts China’s airline industry as companies have to pay for imported aircraft, parts and fuel in dollars. The costs of servicing dollar-denominated debt also increase.

Homebuilders are also among the worst performers so far this year as the country’s housing market slumps.

The sector, which accounts for up to 30% of its GDP, has been crippled by a government campaign since 2020 to curb reckless borrowing from this type of industry. Property prices have been falling, as have new home sales.

The crisis has escalated in recent months as thousands of disgruntled homebuyers threatened to stop paying their mortgages on unfinished homes, shaking markets and prompting companies and authorities to take steps to defuse the crisis.

Country Garden, China’s No. 1 developer by sales, reported a 96% drop in net profit in the first half, the biggest since its 2007 listing in Hong Kong.

The company said it was pressured by “forces beyond our control, such as the resurgence of the pandemic in various parts of mainland China and extreme weather, which have been combined with the slowdown in the real estate sector”.