As the real estate industry continues to slump, spreading to other sectors, the net profits of Chinese listed companies in 2023 decreased for the first time in five years.
According to data from DZH reported by Nikkei Asia on Friday, May 3rd, the combined net profit of about 5,200 non-financial companies listed in mainland China in 2023 amounted to 2.85 trillion yuan, a decrease of 100 billion yuan compared to 2022, representing a 3% decline.
In the first quarter of 2024 (January to March), the net profit of these companies dropped by 5% year-on-year. This indicates a slow recovery in corporate profitability amidst deflationary pressures in the Chinese economy.
The decline in profits of Chinese listed companies is related to the downturn in the real estate industry. In 2023, Chinese real estate companies suffered a net loss of 13.5 billion yuan, the first loss reported since 2000 according to official statistics.
Since Beijing implemented lending restrictions on the real estate industry in 2020, a series of developers have faced liquidity issues, leading to bankruptcies, defaults on dollar bonds, and significant delays in property delivery.
Currently, both state-owned and private developers are facing increasingly severe credit problems. Troubled developers such as Evergrande and Country Garden, listed in Hong Kong, are subject to stricter regulations compared to mainland listings. This suggests that the challenges facing the Chinese real estate sector may be more severe than the data from mainland-listed companies indicate.
The real estate sector and its related industries account for about 30% of China’s GDP. The real estate downturn is now spreading to closely related industries, with steel companies in China experiencing a 13% drop in net profits in 2023, and non-ferrous metal companies recording a 29% decline.
Furthermore, profits of petroleum and chemical companies fell by 18%, while machinery manufacturers saw a 0.2% decrease in net profit.
Chinese economic activity briefly rebounded at the end of 2022 after emerging from COVID zero-tolerance policies, but then softened again. Property prices began to steadily decline, especially in areas outside major cities, leading many companies to lack confidence in future investments.
One of the biggest issues in the Chinese economy is weak consumer spending. The imminent challenge, as noted by Nikkei, will be addressing the unemployment issues among the younger generation and the negative wealth effects brought by the downturn in the real estate market before consumer expenditures lose momentum.
The capital efficiency of Chinese enterprises has been stagnant, with the return on equity (ROE) declining by 0.7 percentage points to 7.7%. In comparison, Japan and the United States have ROEs of 9% and 18% respectively.