Over 4,800 Chinese companies have released earnings for the first half, and analysts are calling it a bloodbath. Roughly 53% posted declines in net profits, a number almost as bad as when the entire nation came to a standstill under the total lockdowns of the Covid pandemic. During that period 54% of companies listed drops in profits in the first quarter.
Some are noting however, that by some measures, this year is even worse. Nearly 900 companies reported a loss in the first half of this year, compared to only 780 which reported losses in the first half of 2020.
Some analysts worry that because Chinese companies are large buyers of commodities, technologies, and other products, a collapse in the Chinese economy could reverberate across the globe.
Alicia García Herrero, chief economist for Asia Pacific at Natixis, a French investment bank noted, “We’ve already seen the impact,” as the price of crude has begun to retreat, and semiconductor companies have reported diminished orders, as China keeps repeatedly locking down every time officials feel they have a breakout of the virus, and a collapse in the real estate market leaves citizens feeling less wealthy and purchasing less.
In the second quarter China’s GDP rose just 0.4% over the previous year, in the worst performance since 2020. Forecasts for China’s annual economic growth have been slashed to 3% or less by several major investment banks over the previous month.
Meanwhile China is being battered by a record heatwave that swept across the southern part of the country, forcing factories to shut down due to the strain placed on the power grids.
Nomura analysts said in a research report, “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.”
The slump has also hit China’s tech companies hard. Alibaba reported flat revenue, ending years of explosive growth, and Tencent reported its first quarterly sales drop.
The air travel sector has been hit hard as well. Air China (AIRYY), China Southern Airlines (ZNH), and China Eastern Airlines (CEA) all posted record losses. Combined they saw a loss of 50 billion yuan ($7.2 billion) in the first half. They attributed the losses to a weakening yuan vs the dollar and continual lockdowns. The weakening yuan hits profits hard as the airlines buy fuel that is priced in dollars. As the yuan weakens, it takes more of it to pay for an equal amount of fuel.
Dragging everything down is the property sector, which accounts for as much as 30% of China’s GDP. It is being crippled by a push by the government to reign in reckless borrowing which has plagued the sector. That has slowed home construction, and since units are pre-bought, it has left many new home-purchasers with agreements promising them a home, but developers unable to finance the necessary funds to actually build the promised property.
The problem escalated recently, as such home buyers, fearing they would pay off their mortgages and possibly never acquire their property, announced they would no longer pay the mortgages they had agreed to, until their homes were delivered. Their plight has spooked other potential homebuyers, cratering the sales of new units which developers need, to fund their ongoing projects, as it drops home prices, reducing margins for developers.
China’s top developer by sales, Country Garden, reported a 96% collapse in net profit in the first half, the largest it has ever seen since listing in Hong Kong in 2007. The company blamed, “forces beyond our control such as resurgence of the pandemic in various parts of mainland China and extreme weather, coupled with the downturn in the property sector.”
