China’s trade surplus is set for a third year of decline

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Chinese corporate profits are expected to show a third consecutive year of decline in 2024, with the trend expected to continue this year as deflationary pressures weigh on the world’s second-largest economy.

Corporate profits in China for companies with revenues of more than Rmb20mn ($2.7mn) fell by an average of 4.7 percent a year between January and November, according to the latest data from the National Bureau of Statistics. This is greater than the 4 percent decline seen throughout 2022 when the country was under lockdown.

Revenue grew by just 1.8 percent per year between January and November 2024 over the same period in 2023. This compares to growth of 5.9 percent in 2022 last year.

In addition, 25 percent of Chinese companies with revenue of more than Rmb20mn made a net loss between January and November 2024, compared with 16 percent in the full year of 2019 before the outbreak, the data shows. of NBS showed. The agency’s data covers 500,000 companies.

“The main reason for that decline, I would say, is deflation“said Laura Wang, chief China equity strategist at Morgan Stanley.

Fourth-quarter GDP numbers on Friday will show whether the country has met its official economic growth target of around 5 percent by 2024 amid concerns about a stagnant economy and low confidence in customers.

China is facing a double-speed economy, with imports dampening weak domestic demand as households deal with a sharp decline in assets.

Official data on Monday showed stronger-than-expected growth last month. Exports rose 10.7 percent in December from a year ago in dollar terms, while imports rose 1 percent, beating analysts’ consensus estimates from Reuters for a rise in the share. of 7.3 and a decrease of 1.5 percent respectively.

In November, exports rose 6.7 percent year-on-year, while imports decreased 3.9 percent.

The data came a week before Donald Trump is scheduled to take office in the US and promises to raise rates with Chinese goods. China’s total trade with the US increased 6.9 percent in 2024 compared to a year earlier to $361.03bn, Chinese customs figures showed.

But China’s growing trade surplus has not been enough to stem the glut among manufacturers, leading to fierce competition that is undercutting their commodity prices and hitting profits.

NBS reported 28 months of commodity price deflation – the price at which firms sell their assets – and economists predict this trend will continue this year.

“Corporate profits remain weak amid prolonged PPI cuts,” Citi analysts said in a note. “The light nature of the latter and excessive competition can drive down profitability, which affects private investment decisions.”

China’s largest state-owned enterprises were the worst performers in the NBS’s corporate profit data, despite being heavily promoted by President Xi Jinping’s government.

Their profits fell 8.4 percent year-on-year between January and November, compared with 1 percent or less for private or foreign companies, the best performers in the group.

Limited involvement of state-owned enterprises – which are often tapped by the government to carry out various public or political activities, from buying stocks to supporting Xi’s Belt and Road Initiative international program – was a burden on financial resources, analysts said.

“At the current rate of contraction, I don’t think they can continue for many years (more) with this kind of policy,” said Lixin Colin Xu, senior economist at the Development Research Group. former World Bank and Chinese company expert.

Data from the China Association for Public Companies shows that of the 5,368 listed companies in China, 23 percent reported annual losses in the first nine months of 2024, while 40 percent reported profits. decreased and 45 percent have decreased income.

Morgan Stanley’s Wang said he expects profit growth of 5 percent each year through 2025 from companies in the MSCI China index, a figure tracked by international investors, compared with 7 percent a year the past.

In a deflationary environment where revenue growth was difficult to achieve, companies will need to take into account the returns of investors in ways such as share prices and dividends, he said.

Previously, companies focused more on reinvesting to capture growth opportunities. “For most of the past 20 to 30 years, they’ve all been growing and working under that concept,” Wang said. “Now they have to change that.”