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The extent of China’s economic slowdown is set to be laid bare this week as corporate earnings reports are forecast to log poor performance and companies are expected to downgrade outlooks, particularly in sectors with heavy exposure to the struggling real estate industry.
Second-quarter results come as a liquidity crisis among property developers and shaky local government finances compound investor doubts that Beijing will deliver enough stimulus to put the world’s second-largest economy back on track.
Earnings will also provide vital data points for global markets, as China’s publication of economic statistics comes under greater scrutiny following Beijing’s decision this month to halt the release of data on youth unemployment.
“For the next week, we’ll likely see less encouraging numbers coming out of China in terms of results,” said Kinger Lau, chief China equity strategist at Goldman Sachs, which recently lowered its full-year forecast for earnings per share growth to 11 per cent from 14 per cent.
“Fundamentally we feel pretty confident that things will get even more challenging for the financial and property sectors without a greater policy response,” Lau said. “That’s very much still the key variable driving equity market returns.”
The earnings season comes as Beijing seeks to boost investor confidence in the country’s lagging stock market. Chinese authorities on Sunday halved the stamp duty levied on stock transactions to 0.05 per cent and pledged to slow the pace of initial public offerings in Shanghai and Shenzhen, which can drain liquidity from the broader market and weigh on share prices.
The moves spurred gains of as much as 5.5 per cent for the CSI 300 index of Shanghai- and Shenzhen-listed stocks on Monday, taking year-to-date gains to about 1 per cent, compared with a rise of almost 15 per cent for the S&P 500 over the same period.
Expectations for more downgrades in companies’ outlooks are partly a matter of timing. Many groups that have already reported this quarter are in the consumer and technology sectors, which have benefited more than most from China’s reopening after strict coronavirus restrictions.
Those have been mostly in line with consensus forecasts from analysts polled by Bloomberg, which tip earnings per share at companies included in the MSCI China stock index to rise about 18 per cent in 2023.
By contrast, the listed companies reporting this week are more concentrated in sectors that have come under substantial stress this year, such as property, heavy industry and finance. Top names include Industrial and Commercial Bank of China, the country’s biggest by assets; Country Garden, once China’s largest developer by sales; and infrastructure group China Communications Construction.
Earnings expectations have been trending lower over the past two months, pushed down by missed payments from developers and investment group Zhongzhi, one of the largest players in China’s nearly $3tn shadow financing market.
Morgan Stanley on Friday cut its 12-month forecast for the MSCI China index to 60 — barely above its current level — with the stock benchmark already down more than 7 per cent this year. Analysts at the bank said the move was partly driven by “much lower earnings expectations in 2023”, forecasting annual earnings growth of just 2 per cent.
Net foreign sales of Shanghai- and Shenzhen-listed shares so far this month through Hong Kong’s Stock Connect programme have topped Rmb73.7bn ($10.1bn), completely reversing a surge of inflows spurred in late July by pledges from top Chinese leaders to deliver greater policy support.
Strategists including Frank Benzimra, head of Asia equity strategy at Société Générale, anticipate more earnings downgrades in the coming week will drag expectations still lower.
“The [18 per cent] consensus is quite elevated given the underwhelming [economic] growth we’ve had this year,” Benzimra said. “It’s more realistic to expect earnings growth of between 8 and 12 per cent this year.”