Chinese company profits are collapsing as covid zero takes its toll

'Are the best days behind China now?' Disillusioned Chinese ponder future
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More than 4,800 Chinese companies listed in Shanghai, Shenzhen and Beijing have already published their results for the first half of the year. It was a bloodbath.

Up to 53% registered a decrease in net profit, according to data from Wind and Choice, two important financial information services in the country. That was almost as bad as 2020, when companies posted their worst earnings season on record as the country hit a almost stopped during the initial coronavirus outbreak. Back then, 54% of listed companies saw their profits fall in the first six months.

By another measure, however, the start of this year was worse. The number of companies reporting losses hit a record high of nearly 900 in the first half. In 2020, around 780 lost money.

A collapse in profits in the world’s second-largest economy could have repercussions around the world. That’s because Chinese companies are big buyers of raw materials, technology and other products on the world market.

“We’ve already seen the impact,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis, a French investment bank. The prices of oil and other energy commodities have fallen and semiconductors Factories have started to see a slowdown in orders, he added.

The Chinese metropolis of Chengdu locks up 21 million residents

Experts blamed China’s strict Covid restrictions and a deepening crisis in the real estate market for the dismal performance of companies.

“The key reasons are mobility restrictions and a big drop in sentiment associated with the demise of the real estate market,” Garcia-Herrero said.

Larry Hu, chief China economist for Macquarie Group, said the low earnings reflected the slowdown in China’s economy, which was being dragged down by falling real estate, a worsening Covid situation and a weakening economy. world.

China has so far stuck to its zero policy-Covidwhich often leads to strict restrictions on the movement of people and quick locks of cities in a few cases. Travel to and from China is also limited.
Shanghai, the financial center of the country of 25 million people, was placed under a two-month lockdown at the beginning of this year. Since then, many other key cities have also tightened restrictions on residents and businesses. On Thursday, Chengdu, a city in the southwestern province of Sichuan, locked up its 21 million residents after a spike in Covid cases.
A police checkpoint during restrictions imposed in Chengdu, Sichuan province, due to an outbreak of Covid-19.

China’s GDP expanded just 0.4% in the second quarter from a year earlier, the weakest performance since early 2020. Last month, several major investment banks lowered their forecasts for China’s annual economic growth to 3 % or less.

Analysts are also concerned about a record heat wave which recently swept across southern China, prompting some provinces to close factories to save energy.

“Whether Beijing decides to start relaxing [zero-Covid policy] From March 2023, we expect the economy and markets to experience a difficult period, as people will be disappointed by the lack of a real opening or will be overwhelmed by a growing covid infection”, Nomura analysts said. in an investigative report on Friday.

big losers

China’s most prominent tech companies are among those suffering. The second quarter marked the end of years of explosive growth with alibaba (slime) fixed income reports for the period from April to June. Tencent (TCEHY) posted its first quarterly sales decline.

For some other sectors of the economy, this year has already been the worst on record.

China cuts rates as lockdowns and housing crisis take their toll
Three of China’s largest airlines: china air (AIRYY), South China Airlines (ZNH)Y China East Airlines (CEA) — posted record losses, with a combined loss of 50 billion yuan ($7.2 billion) in the first half. All blamed travel disruptions due to Covid restrictions and the depreciation of the yuan, which has plunged 9% against the US dollar this year.

A weaker currency hurts China’s airline industry because it has to pay for imported aircraft, parts and fuel in dollars. The costs of servicing dollar-denominated debt also increase.

Property developers are also among the worst performers so far this year as the country’s real estate market has soared lower.

The sector, which accounts for up to 30% of its GDP, has been hit by a government campaign since 2020 to curb reckless lending in the industry. Property prices have been falling, as have new home sales.

The crisis has intensified in recent months as thousands of disgruntled homebuyers threatened to default on mortgages on unfinished homes, rattling markets and prompting businesses and authorities to take action to defuse the crisis.

Country Garden, China’s No. 1 developer by sales, reported a 96% drop in net profit in the first half, the most since its listing in Hong Kong in 2007.

The company said it has been affected by “forces beyond our control, such as the resurgence of the pandemic in various parts of mainland China and extreme weather, coupled with the downturn in the real estate sector.”

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