China earnings miss casts doubt on Xi’s bid to end deflation

[BEIJING] Beijing’s campaign to rein in price wars and blunt deflation has done little to lift third-quarter earnings, leaving investors short on catalysts as Chinese stocks extend their losses into a second month.

Members of the MSCI China Index recorded a 1.1 per cent negative earnings surprise for the July to September quarter, continuing weakness from the previous quarter, according to Bloomberg Intelligence.

Disappointing results in the real estate and consumer sectors outweighed positive surprises in materials and financials. The findings were based on results from companies accounting for 97 per cent of the index’s market capitalisation.

Analysts said that China’s months-long “anti-involution” drive to curb excessive competition has had limited success outside of a select number of sectors such as materials, in easing deflationary pressures or boosting profitability. Industrial profits have also resumed declines after a short-lived rebound, weighing on the earnings outlook.

“Earnings recovery will be critical in 2026, given that much of the rally this year has been valuation driven,” according to Marvin Chen, an analyst at Bloomberg Intelligence, adding that anti-involution measures will likely play a bigger role in 2026.

Price wars and reduced government subsidies were major factors that hurt electric vehicle (EV) makers’ bottom lines in the quarter, with Li Auto, Nio and XPeng all recording revenue and vehicle delivery forecasts that missed estimates.

While Xiaomi’s EV division and Geely Automobile Holdings recorded strong growth, both face margin risks on the back of scaled-back tax incentives.

Materials firms, meanwhile, had a breakout year thanks to a surge in gold prices. Zijin Mining Group, one of the world’s biggest producers, posted a 57 per cent jump in net income, while that of Jiangxi Copper increased by 35 per cent.

Though solar companies saw a small earnings improvement, many remain deep in loss-making territory. Longi Green Energy Technology, for example, narrowed losses in Q3.

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The softer results come after investors had bid up a number of sectors on hopes that the anti-involution pledge by President Xi Jinping would result in a corporate earnings turnaround. Those same investors are now grappling with limited progress in the country’s fight against deflation.

That said, new measures by China to boost spending and spur economic growth may provide some upside relief for sectors. JPMorgan Chase analysts wrote in a Nov 17 report that luxury property sales bucked the weakness and that a K-shaped consumption recovery is emerging, favouring the premium luxury sector.

Still, even earlier drivers of market gains are losing steam. Technology shares, which benefited from profit forecast upgrades earlier this year, are facing a reality check with lukewarm Q3 results.

Alibaba Group saw profits plunge as spending on consumer subsidies and data centres surged, and Baidu posted its steepest quarterly revenue drop on record, highlighting weakening advertising business and costly artificial intelligence bets.

Any bullish outlook for MSCI China earnings hinges on expectations that e-commerce companies’ growth will accelerate next year as price wars ease, wrote Morgan Stanley analyst Laura Wang in a Nov 25 note.

Year-end and 2026 guidance will be critical to watch, she added, warning that weak consumption could curb discretionary spending until clearer signs of stabilisation emerge. BLOOMBERG