Chinese firms set for best earnings growth in seven years in 2024

Chinese firms are on track for their strongest earnings expansion in seven years in 2024, LSEG estimates based on analysts' expectations for government measures to prop consumer demand and an ailing housing market showed.

A Reuters analysis of 1,721 Chinese companies with a market value of at least $500 million shows their profits may rise 16 percent next year, the highest since 2017, when profits rose 20.9 percent.

They are expected to post a smaller growth of 14.5 percent in 2023, according to the data.

"China's post-Covid economic recovery has been fragile, but the problems are mainly cyclical," said Minyue Liu, investment specialist for Asia and Greater China equities at BNP Paribas Asset Management.

To combat a slump in the property sector, which accounts for about a quarter of China's GDP, the government has stepped up spending, infrastructure investments by local governments and other housing programmes.

"These measures could boost (earnings) growth and help asset prices recover in 2024," Liu said.

As per the forecasts, the consumer staples and software sectors are set to post earnings growth of 40 percent and 30 percent, respectively.

The consumer discretionary and industrial sectors are each expected to see roughly 20 percent growth, while the real estate sector may grow 18 percent. The energy and banking sectors are estimated to see the slowest growth of 4.3 percent and 8.2 percent, respectively.

John Lau, portfolio manager for Asia Pacific and emerging market equities at SEI, said it was encouraging to see recent initiatives for the real estate sector being more targeted than mere incremental funding support from banks as in the past.

Such stable or growth-centric government policies would also boost investor confidence in the e-commerce and consumer sectors, Lau added.

Some macro indicators have already started recovering, suggesting an economic rebound next year.

The country's third-quarter GDP surpassed expectations and imports are rising again, signalling robust domestic demand. National highway truck traffic, gasoline consumption, and retail sales have also increased.

"Macro indicators are already flashing some encouraging signals that China's targeted policy support this year may be starting to bear fruit," said Alec Jin, investment director of Asian equities at abrdn.

Both domestic recovery and consumer spending could resume meaningfully next year, he said.

Analysts, however, worry about the risks of a repeat of 2023 which kicked off with big hopes for a post-pandemic rebound that fizzled quickly, leading to a drop in stock prices and investment outflows.

The Shanghai Composite index is down about 2 percent this year. Between April and October, foreign investors withdrew $21.2 billion from Chinese stocks through the Stock Connect program.

"The main domestic risk would be that the expected stabilisation and recovery in real estate could take a longer time to materialise than what the market is currently expecting," said Jin.

Caroline Yu Maurer, head of China and specialised Asia strategies at HSBC Asset Management, said ongoing US-China geopolitical tensions, especially export restrictions, add to the risks and could affect growth in specific industries, such as artificial intelligence and technology.

Maurer, however, points to how cheap Chinese stocks are and that the risks might already be priced in.