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China’s corporate profits are set to show a third consecutive year of decline in 2024, with the trend expected to continue through this year as deflationary pressures weigh on the world’s second-largest economy. world.

China’s corporate income for companies with more than Rmb20mn ($2.7mn) in revenue fell by an average of 4.7 percent year-on-year between January and November, according to the latest data from the National Bureau of Statistics. . This is greater than the 4 percent decline seen throughout 2022 when the country is under pandemic lockdowns.

Revenue grew just 1.8 percent year-on-year between January and November 2024 over the same period in 2023. This compares to 5.9 percent growth in 2022 last year.

In addition, 25 percent of Chinese companies with revenue above Rmb20mn made a direct loss between January and November 2024, compared with 16 percent in the full year of 2019 before the pandemic, it showed NBS data. The agency’s data covers 500,000 companies.

“The biggest factor behind the slowdown, I would say, is deflation“said Laura Wang, chief China equity strategist at Morgan Stanley.

Friday’s fourth-quarter GDP figures will show whether the country has met its official economic growth target of around 5 percent by 2024 amid concerns of a stagnant economy and low confidence among those consumer.

China is grappling with a two-speed economy, with strong exports offsetting weak domestic demand while households face a deep asset slump.

Official data on Monday showed stronger-than-expected trade growth last month. Exports rose 10.7 percent in December year-on-year in dollar terms, while imports rose 1 percent, beating average analyst forecasts from Reuters of a 7.3 percent increase and 1.5 percent decline. , respectively.

In November, exports increased by 6.7 percent year-on-year, while imports decreased by 3.9 percent.

The data comes just a week before Donald Trump is scheduled to take office in the US with the promises to sharply raise tariffs of Chinese products. China’s trade surplus with the US increased by 6.9 percent in 2024 compared to a year earlier to $361.03bn, Chinese customs figures showed.

But China’s growing trade surplus has not been enough to offset manufacturers’ oversupply, leading to fierce competition that has eroded prices for their products and hit profits.

Reported by NBS 28 months of producer price deflation – the price at which factories sell their goods – which economists predict will continue this year.

“Corporate profits are wearing thin amid prolonged PPI deflation,” Citi analysts said in a note. “Slow end-demand and excessive competition can only send profits lower, weighing on private investment decisions.”

China’s giant state-owned enterprises were the worst performers in the NBS’s corporate income data, despite being heavily promoted by President Xi Jinping’s government.

Their profits fell 8.4 percent annually between January and November, compared with 1 percent or less for private or foreign companies, the group’s best performers.

The weakening performance of state-owned enterprises – which are often dragged by the government to perform various social or geopolitical roles, from buying stocks to supporting Xi’s Belt and Road Initiative internationally infrastructure program – a burden on fiscal resources, analysts say.

“At the current rate of decline, I don’t think they can continue for many (more) years with this kind of policy,” said Lixin Colin Xu, a former lead economist at the World Bank’s Development Research Group and a expert in Chinese companies.

Data from the China Association for Public Companies shows that of 5,368 listed companies in mainland China, 23 percent reported an annual net loss in the first nine months of 2024, while 40 percent reported a decline in profits. and 45 percent falling income.

Morgan Stanley’s Wang said he expects 5 percent annual earnings growth by 2025 from companies in the MSCI China index, the benchmark followed by international investors, compared with 7 percent last year.

In a deflationary environment where revenue growth is harder to achieve, companies should pay more attention to returning investors through mechanisms such as share buybacks and dividends, he said.

In the past, companies focused more on investment to capture growth opportunities. “For most of the last 20 to 30 years, they all grew up and operated under that mindset,” Wang said. “Now they have to change that.”