Chinese companies face a challenging environment

Chinese companies face a challenging environment

A Chinese national flag flies in front of a building under construction in the central business district of Beijing, China, on February 1, 2019.

Giulia Marchi | Bloomberg | Getty Images

BEIJING — An early look at the state of some Chinese businesses for the third quarter indicates many companies are still waiting for the worst to blow over.

The world’s second-largest economy reported third quarter growth of 6% on Friday. The figure missed analysts’ expectations for what many were already predicting would be a rough quarter for China.

Even for China’s giant state-owned enterprises — which are typically less efficient — profits in the first three quarters grew 7.4% from a year ago, according to online government statements. That’s slower than the 8.6% rate in the first half of the year, the data showed. It was not clear how much profits changed in the third quarter alone.

For privately run companies, a clearer picture of their ability to maintain profits, or reduce losses, may emerge by the end of the month.”

Due to the impact of China-U.S. trade tensions and domestic structural adjustments, businesses’ operating situation in the third quarter is not as good as the same period last year.

Liu Xiangdong

China Center for International Economic Exchanges

Amid trade tensions with the U.S. and Beijing’s efforts to reduce reliance on debt for growth, the Chinese government has unveiled a slew of measures to support growth. But whether it’s tax cuts or encouraging lending to privately run enterprises, the new policies have yet to translate into a significant economic boost.

“Due to the impact of China-U.S. trade tensions and domestic structural adjustments, businesses’ operating situation in the third quarter is not as good as the same period last year,” Liu Xiangdong, deputy director of the economic research department at the Beijing-based China Center for International Economic Exchanges, said earlier in the week.

“However, there’s improvement from the worst period of the first half of the year,” Liu said, according to a CNBC translation of his Mandarin-language remarks. He expects the business situation to gradually improve, especially if China and the U.S. can reach a trade agreement in the fourth quarter.

China’s finance sector

The financial industry may offer some clues into China’s economic health, as it sheds light on how much demand there is for companies to expand their business.

“For all banks, no matter small or large, doing business is rather difficult,” said Weng Tao, Beijing-based partner in financial services practices for Oliver Wyman’s Greater China team. That’s according to a CNBC translation of his Mandarin-language remarks.

“The customers you could serve, you pretty much already serve,” Weng said. “The points of breakthrough (in business) aren’t that great.”

Rather, he noted that greater focus is on how to maintain a stable business, while new government policies or adoption of financial technology will have more effect in the longer term.

Growth sectors remain

There are certainly many pockets of growth in China, especially in technology and services. And a GDP growth of 6% is still faster than most major developed economies.

For example, Luo Hao, analyst with China Asset Management Company, said he is relatively optimistic on the third quarter overall, based on his analysis of the consumer sector. He noted that high-quality Chinese alcohol, known in China as baijiu, have maintained double-digit revenue growth and margin expansion.

Meanwhile, some home appliance companies may face some growth challenges such as dealing with streamlining their business and handling industry price wars this year.

That said, Chinese automakers are bearing the brunt of a months-long slide in auto sales. China’s exports fell 3.2% in September from a year ago in U.S. dollar terms, while imports dropped 8.5% during the same period, according to Reuters.

Faced with increased tariffs from the U.S. on Chinese goods, some manufacturers have been lowering prices, in turn cutting into their profit margins.

In the end, “whether the economy can ultimately stabilize depends on the strength of fiscal support and whether money is kept idling among financial institutions, or really being transmitted to (business) entities,“ Zhao Bowen, research director at Beijing-based Blue Stone Asset Management, said in a Chinese note translated by CNBC.

The People’s Bank of China said Tuesday that its recent survey of more than 300 cities found that medium and micro-sized companies maintained a relatively strong demand for credit, and 60% of banks believe that in the fourth quarter, demand for loans will increase from a year ago.

However, Chinese authorities have noted that the economic situation they face is complex.

When asked for details from the survey about corporate demand for loans, Sun Guofeng, head of the central bank’s monetary policy department, said there are multiple factors at play in bank lending.

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