Chinese firms' reports reveal reform, growth outlook

BEIJING - Most of China's listed companies have handed in their performance sheets for the first half of the year, offering insights into the country's industrial reform progress and economic growth outlook.

A total of 2,558 firms listed on the Shanghai and Shenzhen stock exchanges had disclosed their semiannual financial reports as of Sept 1. Overall profit growth dropped from a year ago in the first half of the year as economic slowdown continued to weigh on business performance.

Listed firms raked in combined net profits of 1.27 trillion yuan ($205.9 billion) in the January-June period, up 9.47 percent year on year. However, the growth rate, although better than the first quarter, was still outpaced by that of the same period in 2013, when listed companies saw profits increase over 11 percent due to a low base in the previous year.

Cooling economy

Firms in the steel and coal sectors, which once topped the country's listed firms in profits and are closely tied to economic growth, were among the worst performers this time.

Guangdong-based steel firm SGIS Songshan Co, Ltd reported a loss of over 700 million yuan in the first half of 2014, compared with narrow profits last year. Lingyuan Iron and Steel Group and Chongqing Iron and Steel Group were also in the red, blaming overproduction in their reports.

The steel industry's poor performance was reflected in its production managers' index (PMI) over the past six months, which has mostly stayed below the boom-bust line of 50 percent. The sector's August PMI only reached 48.4 percent, down 0.2 percentage points month on month.

Shrinking demand and overproduction also dragged down the performance of the coal sector, with most coal firms reporting losses or falling profits, pointing to slackening economic growth and factory activity. China Shenhua Group Co, Ltd, the country's largest coal supplier, unexpectedly fell from the list of top ten earners.

China's economy expanded 7.4 percent year on year in the first half with a strong second quarter, but downward pressure still looms large for the world's second-largest economy, which also casts a shadow over business performance.

No more easy money

It is no surprise that the top ten profit makers are still mostly giants in the banking and petrochemical sectors. According to the reports, 16 listed banks raked in about 685 billion yuan, accounting for over half of listed firms' total earnings.

However, most lenders suffered lower growth rates. The top firm in profits, the Industrial and Commercial Bank of China (ICBC) endured its slowest net profit growth rate since 2010, falling by 5.2 percentage points year on year. Four other banks, including the Construction Bank of China, also saw single-digit growth.

"The economy is facing downward pressure and bad debt is rising. Gone are the days when banks could make easy money and grow quickly, as economic growth slows to facilitate reforms, such as interest rate liberalization," said Zhao Xijun, vice president of the School of Finance with Renmin University of China.

Meanwhile, the property sector, another traditional money-maker, also faltered. According to their reports, 134 listed real estate firms netted about 32.3 billion yuan in the first six months, down about 6 percent year on year. Over half of them saw slower growth rates.

China's largest developer, Vanke, only grew 5.6 percent in year-on-year net profits and saw its lowest gross profits since 2008. China Merchants Property Development Co, Ltd and Gemdale Corporation fell about 30 percent and 50 percent in net profits, respectively.

The lackluster performance is a result of fewer finished projects, falling property prices and rising land costs, as well as destocking efforts, according to Ning Jingbian, a researcher with China International Capital Corporation.

Manufacturing lags financial services in profits	China's service sector activity rebounds to 17-month high: HSBC