Chinese companies report alarming dip in profits as the perfect storm hits the Chinese economy.
The Chinese economy has been hit by a perfect storm. In the third quarter of the ongoing financial year, official Chinese data revealed that GDP growth stood at 4.9 percent, down from 7.9 percent in the previous quarter. This decline in GDP growth is directly eating into profits of big Chinese companies.
Rising prices and low consumer spending create a perfect storm in the Chinese economy:
There are two broad factors that are affecting business earnings in China- raw material inflation and low consumer spending.
Manufacturing of basic raw materials like aluminum, steel and other metals is becoming way too expensive in China, due to an ongoing coal and power crisis. This is leading to an abrupt rise in prices of finished goods. The official producer price index (PPI) rose by 10.7 per cent in September, as against 9.5 percent in August. Factory-gate prices have risen at a record rate due to surging coal costs amidst the ongoing power crisis in China.
For Chinese businesses, there is an interconnected problem – coal crisis is creating a severe power shortage crisis, the same power shortage crisis is inflating the prices of raw materials, and higher raw material prices are leading to greater manufacturing costs and more expensive consumer goods. The end Chinese consumer, who is already not willing to spend a lot of money, is getting further subdued due to higher prices.
On the other hand, both supply and sales in China aren’t showing any signs of growth in the communist nation. The consumer price index (CPI) grew by only 0.7 percent in September – the vast gap in factory gate inflation and retail inflation hints at low consumer spending. The spending capacity of the Chinese people has deteriorated and they are saving up for a period of greater suffering due to sheer uncertainty in the Chinese economy.
In fact, China’s retail sales growth in August slowed down significantly from the expected 7% to just 2.5%. Therefore, while Chinese businesses are spending more, the consumers are spending less, which is leading to really low profits.
How bad is the situation in China – an industry-wise analysis:
All Chinese industries are doing badly at the moment. Bloomberg has reported on performance of five Chinese industries- material suppliers, real estate, consumer goods, manufacturing and power generation.
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