China’s profit rebound means little for bulls fixated on trade
Xi and Trump are expected to finalise a deal this week in South Korea when they sit down in person for the first time since the US president returned to power
[BEIJING] Chinese corporates are likely to deliver their best earnings growth in years this results season. Yet, stock traders fixated on US-China tensions say the recovery in profits would mean little to the market should progress in trade negotiations falter.
Profits at firms listed onshore are seen expanding 5.8 per cent year-on-year in the three months to September, according to China International Capital Corporation, one of the country’s biggest brokerages. That’s the biggest jump since the second quarter of 2021, and compares with 1.6 per cent on-year growth in the immediately preceding quarter.
Stocks have been on a tear, with the benchmark CSI 300 Index climbing for five straight months to September. While its surge was halted abruptly by a renewal of Sino-American trade tensions early in October, efforts by the two nations to ease frictions since have helped resume the rally, reflecting how geopolitics has a big sway on the market.
Top negotiators over the weekend said that they came to terms on a range of contentious issues, spurring an advance in equities on Monday (Oct 27). For investors, of greater and more immediate importance than earnings is a high-stakes meeting between Donald Trump and Xi Jinping on Thursday.
“While the modest upturn in earnings sentiment helps at the margin, we believe that macro chatter around the US-China trade tensions and retail flows related to the artificial intelligence (AI) boom are more impactful drivers for China’s equity markets,” said Homin Lee, a macro strategist at Lombard Odier Singapore.
Stock watchers also pointed to the uneven nature of the profit recovery to downplay its impact on the broader market. The bulk of the growth has been concentrated in a few sectors, such as AI and materials, that have done well on a global scale, or those that have benefited from Beijing’s push to curb excess capacity and rein in price wars, they noted.
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For example, AI chip designer Cambricon Technologies reported a 14-fold surge in quarterly revenue. The firm, dubbed “China’s Nvidia” by retail investors, is one of the biggest beneficiaries of booming demand for chips amid Beijing’s push for the use of homegrown technology. The AI theme has been hot in China since the emergence of a cheap DeepSeek model early in the year, underscored the nation’s growing strength in the sector.
Zijin Mining Group, one of the biggest gold producers around the world, posted 57 per cent jump in net income, benefiting from this year’s record-breaking surge in bullion prices.
On the other hand, key industries with close ties to the economy and local demand, such as consumption and property, remain a drag. Stubbornly weak domestic demand and a bleak jobs outlook are casting doubt on whether the improvement in earnings growth can sustain.
Guangzhou Zhujiang Brewery, which brews and sells beers, reported its first drop in quarterly revenue since 2022, while real estate firm Poly Developments and Holdings Group swung to a net loss.
“Divergence among different industries is becoming more prominent, with sectors such as finance and technology expected to see stable or even improving earnings, while other industries such as consumption may face greater pressure,” said Shen Meng, a director at Beijing-based boutique investment firm Chanson.
That said, an improving earnings trajectory is likely to be seen as an encouraging sign by long-term investors in China. Sell-side analysts seem to be turning more positive, with the 12-month forward earnings estimate for CSI 300 Index members having risen more than 6 per cent since this year’s low in July, data compiled by Bloomberg show.
Trump-Xi meeting
Xi and Trump are expected to finalise a deal this week in South Korea when they sit down in person for the first time since the US president returned to power. Optimism over the progress in Sino-American trade talks saw the CSI 300 gauge rising 1.2 per cent on Monday, the most in about a week.
Opinion has been divided among Wall Street strategists in terms of what the meeting between the two leaders will mean for the market.
While Goldman Sachs and Bank of America are in the bullish camp, Morgan Stanley and Nomura Holdings have recommended that investors be cautious.
“We advise a balanced approach with focus on earnings quality in the near term while awaiting trade tension clarity,” Morgan Stanley analysts, including Laura Wang, wrote in an Oct 23 note. “Stick to quality stocks with high earnings visibility and dividend plays for now.” BLOOMBERG
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