Slowing China Economy Dims Profit Outlook to 2012 Low

The most-actively traded Chinese companies in the U.S. are on pace to report the smallest profits in two years as growth in the world’s second-largest economy decelerates to the slowest since 1990.

Analysts covering stocks listed on the Bloomberg China-US Equity Index estimate that on average they will post earnings of $5.64 per share this year, which would be the lowest profits reported since 2012, data compiled by Bloomberg show. They’ve cut revenue forecasts by 7.9 percent in the past 11 weeks.

Earnings and sales projections are falling as economists surveyed by Bloomberg estimate China’s gross domestic product expansion will slow to 7.4 percent this year, the weakest pace in 24 years, after back-to-back annual increases of 7.7 percent. While the government has implemented tax breaks, accelerated spending and cut some banks’ reserve requirements, investors are concerned that officials aren’t doing enough to stem a decline in real estate prices and boost private consumption.

“What we’re seeing now is the near-term impact of the adjustment in expectations as these policies get implemented,” Alan Gayle, senior investment strategist, who helps oversee about $50 billion for RidgeWorth Investments, said by phone from Atlanta on June 27. “They’re trying to slow down some of the more inflationary real-estate related sectors and improve overall average standards of living.”

The China-US gauge advanced 0.2 percent to 105.96 at 10:07 a.m. in New York today, cutting its loss for the year to 0.1 percent. That compares with a 3.2 percent drop in the Shanghai Composite Index for the first six months, and a 4.5 percent decline in the Hang Seng China Enterprises Index of Chinese companies traded in Hong Kong.

Home Prices

New-home prices last month fell in half the 70 cities tracked by the government for the first time in two years, the Bureau of Statistics said on June 18. SouFun Holdings Ltd., China’s biggest real estate information website, sank 30 percent this quarter in the second-worst performance on the Bloomberg index of the most-traded Chinese stocks in the U.S. E-House China Holdings Ltd., a Shanghai-based online property brokerage, has dropped 28 percent.

While analysts tend to be “pessimistic,” accelerating global growth may improve the prospects for Chinese company profits, according to Katherine Nixon, Chief Investment Officer of Wealth Management at Northern Trust Corp. Economists surveyed by Bloomberg estimate world GDP expansion of 2.67 percent this year and 3.08 percent in 2015.

“Continued global central bank stimulative policies will support this growth,” Nixon said by e-mail on June 27. That “will potentially revive moribund important export markets,” she wrote.

Estimate Cuts

Analyst projections indicate an average 41 percent decline in profits this year from 2013 for companies in the China-US index, data complied by Bloomberg showed. Their sales forecasts have dropped 7.9 percent on average from this year’s high on April 14.

Deutsche Bank AG cut its estimate for SouFun’s 2014 sales by 8 percent, and lowered the earnings projection by 29 percent on June 12 after the Beijing-based real-estate website discounted listing fees to some clients by 40 percent.

Stifel Nicolaus & Co. reduced its 2014 revenue forecast for International Ltd., China’s biggest online travel agency, by 2.1 percent and its profit estimate by 3 percent in a research note dated June 24. Air China Ltd., the nation’s largest airline by market value, said it will lower its base commission rate paid to ticketing agencies to 2 percent from 3 percent from July 1.

Before it's here, it's on the Bloomberg Terminal.