Investors are paying attention to the stock market at a securities business hall in Fuyang, China, on December 5, 2023.
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Chinese authorities are making moves to restore confidence in its battered stock markets.
However, the upcoming company earnings season may present ugly headwinds for the markets.
China’s economy has been struggling to stage a compelling recovery since the country lifted COVID-19 restrictions more than a year ago.
China authorities have started pulling out moves to shore up confidence in the country’s floundering market — but things may not get much better soon.
That’s because there’s another potential headwind ahead: company earnings, which may not be pretty amid China’s struggling economy that grew 5.2% last year. While the economic growth was better than the 3% it posted in 2022, it’s still one of China’s worst showings since 1990.
More than a year after it started lifting COVID-19 restrictions, China’s economy is still trying to stage a convincing recovery. It’s facing significant headwinds from a property crisis, deflationary pressure, and a demographic crisis.
This means companies that are due to post their 2023 annual results or earnings for the last quarter of the year will be “another miss” for the markets, Morgan Stanley strategists Laura Wang and Catherine Chen wrote in a research note this week, per Bloomberg. “Major downward earnings estimates revisions are likely, which will cap valuation re-rating opportunities,” they added.
Broadly, the earnings outlook for Chinese companies doesn’t look great.
Analysts’ earnings estimates for companies represented by the MSCI China Index members have fallen nearly 1% since the start of 2024, according to data compiled by Bloomberg. This is in contrast to a 0.2% rise in earnings estimates for companies in the S&P 500, which tracks 500 of the largest companies listed on US stock exchanges.
Ugly corporate results could undermine Beijing’s efforts to prop up investor confidence in China’s stock markets, which have bled over $6 trillion in market value from 2021.
Yesterday, China’s central bank slashed its requirement for the amount of cash banks need to hold in their reserves. This is expected to inject about $140 billion into the banking system.
The move showed the central bank is becoming more concerned about the ongoing economic slowdown and poor market sentiment, Nomura economists wrote in a note on Wednesday.
Separately, China’s securities regulator implicitly instructed some hedge fund managers to restrict short selling, Reuters reported on Wednesday, citing unnamed sources.
On Tuesday, Bloomberg reported that Beijing is considering a 2 trillion Chinese yuan, or $282 billion, package to stabilize the market.
Premier Li Qiang has also instructed authorities to take more “forceful and effective” measures to stabilize the markets and investor confidence, according to an official statement on Monday. There were no further details.
News that Beijing is trying to boost the investor confidence gave some upside to China’s battered markets.
Hong Kong’s Hang Seng Index was up 2% at 3:01 p.m. local time. The index is 4.8% lower so far this year and nearly 30% lower than this time last year.
The CSI 300 — which tracks 300 Shanghai and Shenzhen-listed stocks with the largest market capitalizations — was also 2% higher after falling 2.7% this year to date. The index is 20% lower than this time last year.