Chinese corporate profits show no sign of a second-half recovery as analysts cut earnings estimates in September by the most in 2-1/2 years, a red flag for investors who expect the world's second-biggest economy to start picking up soon.
China Inc served as an early warning of the economic slowdown which began in 2011. Back then, slowing sales, swelling inventories and sluggish bill payments all pointed to declining demand and deteriorating cash flow, hallmarks of an economy that was losing steam.
Economists polled by Reuters think the third quarter probably marked China's trough - although many had made the same prediction about the first and second quarters too.
September trade figures released over the weekend were better than expected, however, raising some hopes that the economists might be right this time.
China will release its third-quarter gross domestic product data on Thursday.
Corporate profits still look lackluster at best. Inventories are slowly receding, but shipments remain weak, suggesting underlying demand remains subdued.
"GDP growth likely troughed in the third quarter but the Chinese economy is struggling to find another engine of growth," said William Fong, senior investment manager at Baring Asset Management in Hong Kong.
Analysts have cut estimates for Chinese companies in the MSCI China index every month since June 2011, according to Thomson Reuters I/B/E/S. September's revisions were the worst in 2-1/2 years after grim first-half report cards.
The earnings revision ratio for Chinese companies remains negative, indicating there are more reductions than upgrades, a trend that has been in place since the start of 2011, according to Thomson Reuters I/B/E/S.
During the last Chinese slowdown, after the Lehman Brothers bankruptcy triggered a global financial crisis, the CSI 300 index of the top Shanghai and Shenzhen listings bottomed out in November 2008, but economic growth did not start to rebound until the June quarter of 2009.
Last month, the CSI 300 index hit its lowest level since early 2009, and has struggled to regain ground since.
Infrastructure-linked companies such as steel makers were among the first to recover after the global financial crisis because Beijing responded with a 4 trillion yuan ($638.24 billion) stimulus package.
The shock-and-awe treatment worked in the short-term causing a sharp recovery in the economy and stock markets but left China grappling with overcapacity, potential bad loans and a property bubble.
That is why economists widely expect that Beijing will go easy on the stimulus this time, though inflation data released on Monday showed the central bank may have some room to ease monetary policy further.
The Shanghai Composite after doubling between October 2008 and August 2009 has lost three-quarters of those gains in a downward move that has lasted for three years.
"We have to be careful about comparisons with 2008-09," said Michele Mak, a Greater China portfolio manager at BNP Paribas Investment Partners in Hong Kong.
"I think there is agreement at the top levels of government that the way the last stimulus was done was a mistake," said Mak, adding that any stimulus this time is likely to be targeted at areas where there is a perceived shortage, such as railways and social housing.
Mak said petrochemicals and cement are two segments to watch because they are used in the early stages of the production cycle. Neither one was showing a significant pickup in demand, "at least not in a convincing way," Mak said.
The pace of revisions for construction materials and chemicals stocks within the MSCI China index has slowed, but remains negative.
Over the past three months expectations for forward earnings for the chemicals sectors were slashed by more than a third while those for cement stocks were cut by a fifth.
PROFITS, NOT POLICY
Chinese stocks have been known to rally at the slightest hint that Beijing may be opening the spending taps.
China's Ministry of Railways showed in its latest bond prospectus that it had raised its 2012 rail spending projection slightly, which according to Jefferies is the fourth increase in this year's budget.
Railway stocks have surged.
China Railway Construction Corp Ltd shares are up 71 percent this year, although they are still some 56 percent below 2009 highs.
"Our mantra on China is focus on profits not policy," said Adrian Mowat, JPMorgan's chief emerging markets strategist who maintains an "underweight" rating on China stocks.
According to Mitshubishi UFJ, while inventories at automobiles, construction machinery and machine tools are being cut aggressively, shipments are still seeing double-digit declines - a factor that has also left companies holding back their capital spending budgets.
"Usually by Q4 you see capex plans," said Baring's Fong." This year is interesting in that none of the companies I've spoken with are giving me details about their spending plans."
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