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Economy

China stimulus slowly helps companies escape earnings funk

But consumption slump drives automakers into red

Chinese production of cement jumped 20% in the first quarter due to stimulus-spending construction.   © Reuters

SHANGHAI -- Chinese enterprises are beginning to crawl out of the slump that occurred last year, but most gains stem back to the government's stimulus spending, a Nikkei survey has found. 

As seen by the many automakers reporting losses in the January-March quarter, appetite for consumption in China continues to be weak. 

The aggregate first quarter profit dipped roughly 5% from a year earlier among 1,510 listed companies that released earnings forecasts for that period as of Thursday. That would mark an improvement from a double-digit plunge during the previous quarter ended last December.

The companies surveyed by Nikkei represent 40% of the roughly 3,600 publicly traded Chinese enterprises, and excludes financial groups. Many companies indicate ranges in their guidance, and the 5% figure is based in part on averages of upper and lower extremes.

Several industries benefited from public works investment and property redevelopment. Sany Heavy Industry, the big-name construction machinery maker, likely took in a net profit of 3 billion yuan ($446 million), or double from a year earlier.

Unit sales climbed at peers XCMG Construction Machinery and Zoomlion Heavy Industry Science and Technology. All across the country, over 70,000 excavators were sold in the first quarter, an all-time high.

The Chinese leadership headed by President Xi Jinping pledged to double the gross domestic product over the decade through 2020. The Chinese Communist Party aims to keep economic growth above 6% over the next two years, and public work investments have snowballed since about winter of last year.

In March, right after the lengthy Lunar New Year break, cement output jumped approximately 20%. Glass and crude steel also rose by 8-10%. Huaxin Cement's net profit nearly doubled in the January-March quarter, illustrating how economic stimulus policies were a boon for a large chunk of businesses.  

The same cannot be said for enterprises dependent on consumer demand. Changan Automobile is expected to report a net loss of up to 2.5 billion yuan for the three months through March. FAW Xiali Automobile and Haima Automobile are in the red as well.

New vehicle sales in the world's biggest car market fell by double digits in the first quarter, a reality that has hit mid-tier automakers particularly hard. For the nearly 60 auto industry companies in the Nikkei study, including parts suppliers, profit dove all the way down to breakeven territory.

Among retailers, electronic appliance distributor Suning.com will likely turn in profits that are flat or receded slightly. The company is busy opening mini-outlets for its digital operations, which required intense capital spending.

Focus Media Information Technology, an advertising group, reported that profits shrank more than 70% in the January-March period, due to a slower market growth since the fourth quarter of last year. Filmmaker Huayi Brothers Media fell into the red amid an absence of a blockbuster movie.

Although Chinese enterprises may have narrowed the reduction in black ink, the overall financial picture has arguably grown worse. Total debt ballooned 12% last year among the nearly 2,600 non-financial enterprises that delivered annual reports for that period.

State-owned contractor China State Construction Engineering saw debt expand 18%. This indicates how state enterprises, running on leverage, are propping up the economy with investments and public works projects.

However, more than 50 tranches of yuan-denominated corporate bonds have gone into default so far this year. Unpaid debt servicing has ascended to 38 billion yuan, and the yearly scale is on track to match the record 120 billion-plus yuan documented last year. As a consequence, financially strapped private enterprises are being crowded out by state-owned enterprises supported by government largesse.

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