Chinese firms suffer shrinking profits amid challenging recovery

Foreign-invested companies were hardest hit: official data.
By Elaine Chan and Lee Jeong-Ho for RFA
2023.11.27
Singapore and Seoul
Chinese firms suffer shrinking profits amid challenging recovery People wait for traffic lights at the central business district in Beijing on July 23, 2023.
AFP

China’s industrial enterprises continued to be hammered by shrinking profits even as Beijing reiterated that the economy is on track to reach its growth target for the year.

Profits at firms with revenue 20 million yuan (US$2.8 million) slid by 7.8% in the first ten months of the year, a narrowed 1.2-percentage point decline compared with the January to September number, according to data released by the National Bureau of Statistics Monday. 

State-owned enterprises’ profits fell 9.9%, while companies with foreign, Hong Kong and Macau interests declined by a wider 10.2% at a time when China could use more foreign investment. 

The statistics bureau said for October alone, profits at all firms only grew 2.7%. It is a third straight month of profit growth at a significantly slower pace, compared with 11.9% in September and 17.2% in August.

Topline numbers, which grew albeit at an almost unchanged pace, were more encouraging. Revenue for all enterprises edged up 0.3% for the ten months of the year, compared with the year-earlier period.

Chinese economic indicators to date have painted an uneven post-COVID recovery: slowing industrial activities against a recent pickup in domestic consumption, in part boosted by travel and spending during the Golden Week holiday in early October. 

Analysts said more government policies are needed to fend off economic headwinds that include a persisting property crisis, which is tied to the local government debt issue, flagging global demand for manufactured goods, and foreign investors wary of an increasingly inward-looking investment environment. 

Foreign confidence in China

Dwindling profits for foreign-invested enterprises reflected in Monday’s data do not bode well for how foreign businesses perceive the world’s second-largest economy. 

Alfredo Montufar-Helu, head of think tank The Conference Board’s China Center for Economics and Business, said confidence levels among multinational company chief executives vary between industries and companies.

“But it is also undeniable that the state of China’s economy and the uncertainty brought by geopolitical tensions is hurting sentiment,” Montufar-Helu said.

According to the Conference Board’s biannual survey that measures CEO confidence for China released last week, just 31% of business leaders said the economic conditions in the second-half of 2023 were better compared to six months ago, down substantially from 88% in the first-half.

Short-term optimism has also decreased to 51% respondents surveyed versus 79% in the first six months of the year.

Still, Montufar-Helo said CEOs believe that “China remains an unignorable market opportunity.” 

“So, while the drop in confidence is reflective of worsening economic and market conditions, it is not indicative of an intention to leave the market.” 

He added that multinational companies are engaging with Chinese authorities to lobby for market-liberalizing measures. 

“Against the backdrop of economic weakness, I think the government understands the need to improve business conditions so that MNCs are able to contribute their capital, expertise and technologies to increase China’s economic productivity.”

Under Chinese President Xi Jinping’s rule and vision, China has expanded the role for state-owned enterprises and industry policies while tightened its control over the private sector that included crackdowns of industries that were once the biggest employers and profit generators. 

Shoring up

In recent months, the Chinese Communist Party has introduced a slew of measures to address the economic structural problems that are stunting growth. 

It ordered financial institutions to make available capital-raising channels for property developers, while urging private businesses to join hands with state firms to invest in infrastructure to reboot the sluggish economy.

Externally, Beijing is trying to diffuse geopolitical tensions, especially the trade war with the United States since 2018, which have weighed on China’s economy, preventing it from potential further growth. 

The summit between Xi and his American counterpart Joe Biden in San Francisco earlier this month is a first step towards thawing icy relations. The long term resilience of China’s economy may be tied to its relations with the U.S. and the latter’s allies that would give it a larger market access. 

China must maintain its access to international markets and reignite foreign investment to counteract impacts from domestic economic headwinds like impacts from the property slump and local government debts.

Foreign direct investments fell 9.4% to 987 billion yuan (US$138 billion) in the first 10 months of the year, compared with the year-earlier period. China also recorded its first-ever quarterly deficit in FDI by balance of payments for July-September at US$11.8 billion. The measure records monetary flows linked to foreign-owned entities in the country.

Edited by Taejun Kang and Mike Firn.

POST A COMMENT

Add your comment by filling out the form below in plain text. Comments are approved by a moderator and can be edited in accordance with RFAs Terms of Use. Comments will not appear in real time. RFA is not responsible for the content of the postings. Please, be respectful of others' point of view and stick to the facts.