China’s Earnings Gloom Masked by Windfall From Rapid Stock Gains

Chinese earnings returned to growth in the third quarter but a closer look at the numbers reveals a picture that’s far less encouraging.

Profits at onshore-listed companies increased 3.7% from a year ago after declining in the previous two quarters, according to an analysis by China Merchants Securities Co. The improvement was largely driven by a surge in investment returns at financial firms following a stock market rally that began in late September, the brokerage said. Beyond the financial sector, profits declined at a steeper pace in the latest quarter.

The mixed outcome shows Beijing needs to act forcefully to spur an earnings turnaround. While the stimulus drive — which kicked off at the end of the third quarter — may filter through to corporate performance in the months to come, analysts say the boost may be limited unless policies address weak domestic demand. The onus is now on China’s top leaders to deliver on fiscal stimulus promises at this week’s meeting of the Standing Committee of the National People’s Congress.

“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, a director at Chanson & Co. “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.”

Read more: China Stimulus Questions to Persist Long After Meeting This Week

China Merchants Securities’ analysis is in line with that from UBS Securities, which shows insurance and brokers on the mainland reported 233% profit growth in the third quarter from a year earlier. Meanwhile, non-financial earnings dropped 9%, weaker than the 7% slide in the previous quarter.

The CSI 300 Index, an onshore benchmark, surged nearly 35% from a September low through to Oct. 8 as China’s central bank announced a broad package of measures that included an interest-rate cut and liquidity support for the equity market. It has since fallen more than 7%.

Among this season’s standouts, China Life Insurance Co. said net income surged 174% in the first nine months of the year as the equities rally bolstered investment returns. The biggest state-owned banks also eked out profit gains, partly thanks to lower provision charges.

Sectors reliant on consumer demand have continued to struggle. China Vanke Co., a property developer, reported another big quarterly loss. Liquor giant Kweichow Moutai Co. missed estimates, while appliance maker Midea Group Co. met the consensus thanks to hefty foreign-exchange related gains.

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.

The weakness in earnings will likely stretch into the next quarter with most sectors not seeing an immediate uplift from policies, said Xin-Yao Ng, investment manager of Asian equities at abrdn plc.

Adding to the uncertainty is the US presidential election. Some of the most promising sectors including chipmakers will likely remain under pressure from heightened Sino-American tensions no matter who becomes the next US leader.

To be sure, analysts’ earnings projections have been inching higher, flagging the potential for profit improvement in the coming quarters. UBS Securities strategist Lei Meng expects the third quarter to mark an earnings trough as it takes three to six months for favorable policies to take effect.

Forward earnings per share estimates for CSI 300 members have seen an upward revision of around 1.3% in October, according to data compiled by Bloomberg. That marks the first monthly upgrade in about a year.

Major onshore companies have mostly finished reporting for this season. The majority of the MSCI China Index, which includes stocks listed offshore, have also reported, while some big tech names including Alibaba Group Holding Ltd. and Tencent Holdings Ltd. are due to report later this month.

“Third-quarter earnings season has been a bit of letdown for onshore listed companies” with about 60% of them missing consensus estimates,” said Homin Lee, senior macro strategist at Lombard Odier. The remaining earnings report from mostly offshore-listed companies can “amplify the bullish or bearish sentiment for the market,” he added.