Amidst the marked slowing of growth recorded in the world’s second largest economy in the first half of this year, it is no surprise that corporate profits have been adversely affected. Of the 760 listed companies that have reported results for the first six months, more than half have registered a decline in net income from a year earlier. This in turn is weighing on business confidence.
Chinese management have been berating policy officials consistently over recent months to respond more forcefully to the weaker economy. Although some targeted fiscal and monetary measures have been announced, it is clear that more is required. Earlier this month, Premier Wen Jiabao issued an impassioned plea for structural tax changes, which the Chinese cabinet is likely considering. As a result, it would be no surprise if Beijing announced both tax cuts and a further reduction in bank reserve requirements in the near term. The current corporate tax rate in China is 25%.
Against this challenging backdrop for both the economy and profits, it is little wonder that the Shanghai Composite Index has been so disappointing this year – indeed it is one of the worst performing bourses in the emerging-markets universe for the year to date. At the same time, policy-makers have warned that they will proceed only slowly in terms of releasing the hand-brake they have applied to the banking system, in part because they fear longer-term inflation. They are acutely aware that the housing genie could escape from the magic bottle again very quickly.