Chinese GDP growth will never be negative well into the foreseeable future, but corporate profits are already shrinking.
Corporate profits for A-share listed companies are declining, and that the contraction is broad-based across many sectors. Our EM strategist believe that the earnings of listed Chinese companies will remain under pressure as corporate price deflation is still accompanied by rising wage demands.
At a time when corporate nominal revenue growth is at a record low and corporate prices are deflating, wages cannot grow much, and profits certainly cannot expand simultaneously. While we concur that there have been numerous positive developments surrounding Chinese consumers and the broader service sector, the question is how industrial and other companies can raise wages meaningfully and deliver positive profit growth at a time when their selling prices are weak and volumes are lackluster.
Barring an unlikely dramatic turnaround in the economy, either corporate profits will continue to shrink or wages/employment will contract in the next 12-18 months.
Bottom Line: We would not be surprised to see China’s growth stabilize or even marginally improve over the next couple of months, given the large fiscal push and strong credit origination lately. However, our EM strategists doubt that a mild and fleeting growth amelioration will be sufficient reverse the contraction in corporate profits of Chinese companies and foreign companies that sell to China.