THE CHINESE PROFITS PUZZLE / THE WALL STREET JOURNAL

The Chinese Profits Puzzle

Threats to Chinese growth are multiplying but some big companies are still posting their best results in years. What’s going on?

By Nathaniel Taplin

What Chinese growth slowdown? Some of China’s biggest companies, particularly its banks, have been posting their best earnings growth in years, despite all the gloom around a trade fight with the U.S. and rising bond defaults.

The buoyant results don’t mean all is well for the world’s second-largest economy. 
Chinese listed companies’ average earnings per share have slowed from peak double-digit growth rates in late 2016, but were still 8% higher in the first half, according to Wind Info. That, though, mostly reflects the health of state-owned firms: the top three Chinese sectors by market capitalization—finance, industrials and materials—are heavily backed by Beijing.


The government has given two huge shots in the arm to the country’s biggest public companies in the last 18 months—largely at the expense of non-state-owned companies, largely at the expense of the non-state-owned companies, often unlisted, which account for about two-thirds of economic output.

Forced factory closures in heavy industry, aimed at cutting overcapacity, have hit small, private businesses hard. But they have helped boost profits at listed state-owned competitors like Baoshan Iron & Steel Co, which have gained both market share and pricing power. Healthier balance sheets for the likes of Baoshan have in turn helped the state-owned banks which hold their debt: State-owned industrial companies’ profits as a whole were five times as large as their interest payments by mid-2018, up from just three times in early 2017.

Beijing’s crackdown on shadow finance has given an additional boost for the big state-owned banks—and another slap in the face for small, private firms, which often have trouble securing bank loans at reasonable rates through official channels.

As shadow bank lending evaporated in early 2018, weighted average lending rates for traditional bank loans hit nearly 6%, their highest since mid-2015. With deposit rates still low and wholesale funding costs drifting down, bank profits have roared back: Their average earnings per share rose over 4% on the year in early 2018, according to Wind, the best performance since 2014. Meantime, the private sector’s financing problems have worsened: Private industrial firms’ profits were equivalent to nine times interest payments in late 2017, but had shrunk to just seven times by mid-2018.

Chinese stock markets now look cheap on the fundamentals, but better finances for state-owned companies have come at a steep cost for the economy as a whole—by crimping the more vibrant private sector. That bill is still likely to come due in the form of significantly slower growth in the quarters ahead.