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Slipping Industrial Growth Paints Bleak Picture for China Stocks

FILE - An investor speaks at a private securities company in Shanghai, China.

FILE - An investor speaks at a private securities company in Shanghai, China.

The short-term future of China’s stock markets appears dismal, with industrial profits shrinking and an overwhelming majority of companies saying they will not invest additional sums in their business in the second half of 2015.

The Shanghai Composite Index has lost more than 40 percent since its high point in early June.

The market lost about 8 percent last week, even though it saw a small recovery on the last day. The Shanghai index dipped again, closing 0.8 percent lower at 3,205.99 on Monday.

Amid the fall comes new evidence that there is little chance Chinese companies will push up market sentiment in the coming months.

No plans

Almost 97 percent of Chinese companies covered in a nationwide survey have indicated they have no plans to invest additional sums in the second half of 2015.

This is significantly less compared to the first half, which saw 9 percent of the surveyed companies expanding business with fresh investment, according to a survey report by the Center on Finance and Economic Growth at the Cheung Kong Graduate School of Business in Beijing.

The poll, which covered 1,998 companies, is regarded to be the biggest nongovernment survey of industries in China.

"Thus, the economy is facing the possibility of deflation,” said Jie Gan, director at the center.

The government last week announced an interest rate cut, which was widely seen as a desperate attempt to revive the stock market by encouraging more margin financing.

Appropriate range

Premier Li Keqiang said the Chinese economy was operating within an appropriate range of growth, and it would continue to be one of the world’s economic leaders.

Li described recent moves including the rate cut and reduction in the required reserve ratio of banks as “sustained structural reforms” and “targeted macro-regulation measures” – part of a bigger economic transition plan and not a desperate effort to revive growth.

The survey’s results suggest that banking measures may not be a solution because the industry has little need for money. The real problems are chronic overcapacity in production and sluggish investments, said Jie, director of the graduate school.

“Loosening monetary policy alone cannot resolve the core problem of overcapacity and therefore will not revive the industrial economy,” she said.

She advised the government to focus on long-term policies to improve domestic demand and encourage both industry upgrade and technological innovation.

Profit decline

The government’s National Bureau of Statistics also painted a bleak picture as it reported profitability of companies with annual revenues exceeding $3.1 million last week.

NBS said these companies suffered a significant 2.9 percent fall in profits in July, the first month of the second half of 2015, as compared to the same month last year. In actual terms, the loss in July came to $80 billion.

The situation was a little better in June when the companies saw a profit slide of 0.3 percent, it said.

The performance in July has resulted in an overall 1 percent profit decline in the first seven months of 2015 as compared to a 0.7 percent slide seen in the first half of the year.

“The sluggish investment will not improve in the near future,” Jie said, explaining that only 4 percent of the survey companies said they planned to make investments in the third quarter.

Even this investment would not be significant because more of them would be investing on maintenance of existing plants and equipment instead of expanding production capacity.

Examining the reasons behind industrial sluggishness, the surveyors found that 55 percent of the companies have been hit by lack of demand while 32 percent said navigating the market was the most constraining factor.

Rising labor and material costs was cited as a bottleneck by 14 percent and 10 percent of the firms, respectively.

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