Mainland firms thrive despite slowdown

Net profits among companies jump 21pc in the third quarter, driven bya resilient private sector, as the wider economy slows to 7.儲存5pc growthThe mainland is on track to grow 7.5 per cent this year. That is great by the standards of any large economy but disappointing for China, which averaged double-digit growth over the past decade, according to World Bank data.However, mainland firms are thriving in this era of slowing growth. In the third quarter, profit growth among the listed companies accelerated to its highest level since 2010, fuelled by easy credit and restocking, said Standard Chartered.Overall, profits rose 21 per cent year on year, with non-financial firms seeing faster growth than their financial counterparts for the first time since 2010. Companies in the car, paper, petrochemicals, consumer electronics, materials, property, construction, technology, retail and conglomerate sectors all reported profit growth of more than 30 per cent.A resilient private sector was driving this upturn, said CLSA China macro strategist Andy Rothman. In the first nine months of the year, profits among state-owned industrial firms increased 9.4 per cent year on year, while those at larger privately owned groups grew 17 per cent, according to CLSA analysis of official data.When CLSA looked at data for the 200 largest non-financial companies listed overseas – in Hong Kong, the United States and Singapore – it found that private-sector earnings before interest and tax margins of 13 per cent for this year also outperformed the 8.4 per cent posted by state-owned enterprises."People don't realise how entrepreneurial this economy is," Rothman said.This has to be viewed in its context. Last year was a difficult one for mainland firms' profit levels partly because the global export market was weak while the domestic economy was dealing with credit tightening and a leadership transition.Corporate profit grew sharply in the third quarter but investors need to understand that the reference period – the third quarter of last year – was weak."Government at many levels was frozen because of factional infighting. We had a political freeze in decision-making particularly around new investment projects, and then we saw a big collapse in exports – it was very weak last year," said Erwin Sanft, the head of Hong Kong-China equity research at Standard Chartered.The last time mainland firms declared such sharp year-on-year profit rises was in 2009-10 as they rebounded from a disastrous 2008, when the global financial crisis hit.This year's profit rebound also reflects fluctuations in credit supply. The People's Bank of China tightened credit in the first half as it clamped down on unregulated trust loans and wealth management products.Mainland banks used the interbank market each quarter to restore their balance sheets after periods of heavy lending through such instruments. The central bank declined to put money into the interbank market when rates s迷你倉ot up in May and June to send a message to banks to rein in their use of unregulated loans.That decision severely rattled the market, causing some to worry about the health of the banking system."We almost had a Lehman-style meltdown," said Stephen Green, Standard Chartered's head of Greater China research, of the surge in May-June interbank rates.However, since the mid-year shock, the PBOC has backed off. In July, it pumped 17 billion yuan (HK$21.5 billion) into the money market through reverse bond repurchase agreements, the first time in nearly six months. Last month, the central bank injected money into the market following a minor rate increase and made a statement about its resolve to stand by the market."There were two rounds of clampdown [on the shadow banking system] but the authorities have had to ease off. The size of the market is too big to interrupt. It's 10 per cent of total credit supply in the economy," said Sanft, adding that foreign fund flows into the mainland had also been strong recently, bolstering firms' access to capital.The government is also rolling out interest rate reforms that will increase access to bank loans, reducing firms' dependence on unregulated loans.But there are also reasons to believe a more fundamental turn in the profit cycle is under way. Firms have been cutting inventories and trimming capital expenditure, and tighter capacity is now improving profits.Louis Kuijs, the chief China economist at Royal Bank of Scotland, said excess inventory contributed to a manufacturing slowdown last year, and that excess had largely been addressed. "Most of that inventory has been absorbed," he said.Sanft said capital expenditure at mainland firms had been running below sales growth for nearly two years, which he said was helping address massive overcapacity at manufacturers.Jeannine Sargent, the president of the energy department at Flextronics, which has 120,000 employees on the mainland and derives one-third of this year's projected US$24 billion in sales from the country, said she saw greater growth on the mainland than in any other markets.There are voices of discontent. Guangdong manufacturers, which historically have been owned and run by Hongkongers, have for many years seen profits pressured by rising wages. The growth slowdown in the mainland economy adds to their pain.Stanley Lau Chin-ho, the chairman of the Federation of Hong Kong Industries, said many manufacturers from the city were scaling back factory investment and freezing hiring due to slow mainland consumer spending and weak export demand."We understand in this business sometimes there are peaks and sometimes you are on the ground … Firms will stop their investments for a while and await opportunities," Lau said.The picture emerging is of a leaner, thriftier corporate sector with growth increasingly coming from privately owned firms. At the very least, it shows that profits are not always at the mercy of the wider economy.儲存倉