TOKYO/SHANGHAI -- Falling Chinese corporate profits are flashing a warning sign about the country's deepening economic slowdown, according to an analysis by the Nikkei Asian Review, and easier bank credit can only do so much to keep growth going as bad loans have already hit alarming levels at some lenders.
From carmakers to retailers and commodity producers, company profits are down across most sectors in China for the first nine months of the year, in some cases dramatically. The trade war with the U.S., an outbreak of African swine fever, subsidy cuts and slowing economic momentum have all taken their toll, though a number of online retailers, property developers and banks have continued to expand their profits.
A thaw in frosty trade relations between China and the U.S. would help the economy, and an interim trade deal is widely expected before the end of this year -- if U.S. president Donald Trump and Chinese president Xi Jinping can agree over the deal's final terms and where it would be signed.
As for the domestic economy, Chinese authorities have so far been hesitant to introduce any further major economic stimulus in order to avoid aggravating unresolved stresses in the property and banking sectors. The People's Bank of China, however, cut the one-year rate at which it lends to banks to 3.25% from 3.30% on Nov. 5.
Julian Evans-Pritchard, senior China economist at research company Capital Economics, said this "could well precede reductions" on other central bank rates.
If that helps revive growth, after China's output expansion slowed to a 29-year low of 6% in the third quarter according to official statistics, this will not come soon enough for the country's car dealers.
Auto sales have weakened almost across the board in China, with significant knock-on effects. Profits for car battery manufacturer Contemporary Amperex Technology slid 7% in the third quarter due to weaker selling prices. Retailers of electric cars have suffered particularly since the government slashed subsidies for the vehicles in June.
"We can't do anything about (falling sales) since there was the cut in the subsidy," grumbled a young sales agent at a BYD electric car dealership in Shanghai. The carmaker, backed by Warren Buffett, reported a 15% year-on-year sales decline in September and an 89% profit plunge for the third quarter.
Overall net profits for 161 auto-related domestically listed companies dropped 32% in the first nine months of 2019 from a year earlier, according to Nikkei's analysis. More widely, aggregate net profits for 3,607 domestically listed nonfinancial companies fell 2.2% to 1.52 trillion yuan ($216.7 billion), according to data compiled by research company Shanghai DZH.
Even China's largest energy producers have suffered. China Petroleum & Chemical (Sinopec) and PetroChina each reported declines in profit of more than 20% due to slower economic activity and lower oil prices.
Alibaba Group Holding, China's most valuable listed company, is still growing, however. For the July-September quarter, the online retail leader reported 40% growth in revenue and a tripling in profits.
Traditional retailers, as with car dealers, are having a harder time. Profits for Wangfujing Group, a state-owned operator of department stores, malls and supermarkets, dropped 37% over the quarter while sales edged slightly down.
African swine flu, which has decimated the country's pig farms, is another risk factor.
"2020 will be another challenging year for commodity inflation," Joey Wat, chief executive of KFC and Pizza Hut operator Yum China, commented to analysts last month. Rising meat prices, which have spilled over from pork to chicken and beef, have nudged the company into experimenting with offerings such as mushroom burgers.
Guo Lijun, vice president and chief financial officer for WH Group, the world's largest pork producer, recently called the disease outbreak an "unprecedented challenge." So far, however, profits for WH and other major Chinese producers have been on the rise thanks to soaring meat prices. WH reported an 8% profit gain for the quarter.
Bank profits have been rising at a similar pace. For the 33 Chinese banks that disclosed full third-quarter data, loan growth helped bring up their nine-month net income gains to 7.5%.
The flip side amid the country's slowing expansion has been a surge in bad loans, up 4.3% in the quarter. Xiao Yuanqi, chief risk officer at the China Banking and Insurance Regulatory Commission, said on Oct. 21 that nonperforming loans are "still one of the main risks that we face."
The issue is most acute at smaller banks where the situation is "quite tricky," according to S&P Global China Ratings analyst Li Ying. "Keeping nonperforming loan ratios low by growing loan books faster than (bad loans) is not sustainable," she said.
The Bank of Guiyang is a case in point. The city commercial bank, based in Guizhou, one of China's poorest provinces, expanded its loan book by 17% during the first three quarters of the year. This helped fuel a 15% jump in net profit, but its nonperforming loans shot up 28%.
Jiangsu Suzhou Rural Commercial Bank, headquartered in the more affluent province of Jiangsu near Shanghai, is in a similar position. A 13% increase in lending translated into 15% growth in its bottom line while its bad loans grew 32%.
One of the sectors benefiting from looser credit is real estate. The sector, which includes major developers such as China Vanke and Greenland Holdings, enjoyed a 17% jump in net profits over the first nine months of the year.
But high real estate prices have brought problems too. The China Passenger Car Association says expensive housing is crowding out spending on other big ticket items. Consumer confidence is currently not strong enough to support purchases of both housing and cars, the association said in its latest monthly report.
"It is difficult for purchasing power to recover in the short term," it commented.
Additional reporting by Nikkei staff writer Yusho Cho in Shanghai