SHANGHAI -- A record number of listed Chinese companies bled red ink over the six months ended June 30 as oversupply issues persisted in the manufacturing sector and the government's frugality order hurt sales of luxury goods.
Out of 2,556 companies listed in Shanghai and Shenzhen, 366, or about 14%, logged net losses. The manufacturing sector, including steel and nonferrous metals, accounted for the largest share with 247. Falling housing prices hit the real estate business hard, and 26 companies in the sector posted losses.
Aluminum Corp. of China decided in mid-April to stop production lines with 1.4 million tons of capacity. This move, an unusual adjustment for a state-owned enterprise, was aimed at breaking the cycle of excess production and declining prices.
But its net loss for the half widened to 4.1 billion yuan ($667 million), the largest among listed companies, from 600 million yuan in the year-earlier period. Production cuts by the industry's top player were not enough to keep prices from falling. It expects to remain in the red for the January-September period as well, and no signs of a recovery have emerged.
The oversupply issue that has dogged China for several years has been a drag on companies in such areas as steel, nonferrous metals and marine freight. Since the 2008 financial crisis, these industries have ramped up production capacity in response to public works projects implemented to boost the economy. But prices tumbled due to overproduction, and the industries as a whole suffered.
The decline in government demand has also hit companies offering high-end goods and services, due to the drive for frugality led by President Xi Jinping.
China Southern Airlines was one of the companies to bear the brunt of this trend. Foreign exchange losses on a weaker yuan were one reason it dipped into the red for the half, but weak first-class and business-class traffic also played a role. The government and state-owned companies switched to economy class for flights paid for with public funds.
Many brewers of baijiu, a high-end liquor, also logged losses. Sales at Sichuan Swellfun, maker of the Shui Jing Fang brand, plunged 66%, and it posted a 100 million yuan loss for the half as demand dried up for gifts paid for with public funds. This hurt earnings at global liquor giant Diageo, a major Swellfun shareholder.
The Chinese government uses subsidies to shore up corporate earnings. Xuzhou Handler Special Vehicle, which makes such vehicles as fire engines and aerial work platforms, logged a 120,000 yuan net profit for the January-June half, but this would have been a loss without 9.98 million yuan in government aid.
The use of fiscal policy to push up earnings has its limits, but businesses can only do so much through restructuring steps such as staff cuts. If the oversupply issue continues to drag on, fiscal deterioration could spread the impact to a broader range of companies.