Sinking profits turn China’s $3.5 trillion rout into trap
Chinese stocks are experiencing a significant selloff resulting in a loss of $3.5 trillion since May. Increased competition and declining demand have negatively impacted corporate profits across various industries. Many companies, including major technology firms, are under financial pressure, prompting them to seek additional funding. The third-quarter earnings reports have shown disappointing results, highlighting ongoing profitability concerns. Analysts remain cautious about the potential for economic recovery as consumption remains weak.
Pessimism has gripped Chinese stocks, with no end in sight for a deepening selloff as investors confront the realities of an economy that's weak enough to erode corporate profits but not to trigger forceful new stimulus.
The world's second-largest equities market has has lost $3.5 trillion in value from a peak in May, according to data compiled by Bloomberg. The rout intensified last week, pushing the onshore benchmark CSI 300 Index into a bear market and a technology sector gauge in Hong Kong towards erasing all its gains since Beijing's sweeping growth support package two years ago.
At the heart of investor gloom is an unsettling realisation that a protracted consumption slump and the race-to-the-bottom mentality among businesses are taking a heavier toll on earnings across industries, from banks to electric car makers and AI model developers. Further darkening the outlook is the growing perception that Chinese leaders are in no rush to jump-start an economy that is slowing, but at a tolerable speed.
"It is too early to conclude that the worst is over," said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg. "The biggest concern remains profitability: China's strength in production and exports is not translating consistently into stronger domestic demand, pricing power and corporate earnings."
The third-quarter reporting season got off to a disappointing start, with battery giant Contemporary Amperex Technology (CATL) missing profit expectations, a sign of both weak demand and fierce competition.
The consensus 2026 earnings forecasts for members of the MSCI China Index have declined by more than 4% since the end of March, according to data compiled by Bloomberg. The Hang Seng Tech Index, dominated by Chinese Internet firms mired in e-commerce price wars, has seen profit projections plunge by more than 13% over the period.
Read more: Global Market Today: Asian shares slip as AI jitters deepen ahead of big tech earnings
Yet even against lowered expectations, the MSCI China constituents that have released results have missed consensus forecasts by an average of 9%, marking the second-worst quarterly miss in two years, according to Bloomberg calculations.
Among them, AI infrastructure builder China Mobile's January-September net profit fell 8% year on year amid cost pressures, while major materials firm Ganfeng Lithium Group also missed estimates amid falling prices.
Read more: Growth, value stocks set for reshuffle as S&P adopts new rules
"CATL is the best poster child of what's going on: great innovative company that's doing great things but a victim of cut-throat competition and margin squeeze," said Jason Lemire, chief investment officer at Bold Wealth Partners. "Competition is encouraged and generally brutal in China, not shareholder friendly."
Earnings pressure has left companies, particularly China's Internet behemoths, which are in a tense race to fund costly AI infrastructure build-outs, increasingly out of cash. That has forced some of them to tap the equity market to raise funds, such as Alibaba Group Holding's $10 billion follow-on stock sale, which further diluted share value.
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