China's Top Consumer Earnings Show Stocks Recovery is a Ways Off

Expectations of earnings bottoming in the first quarter drove a rebound in Chinese stocks between February and May.

However, the current earnings season is shaping up to be another letdown for Chinese stock investors, eroding the case for a turnaround in the slumping market.

China's first few months of reopening to the world have not gone as planned for global businesses.

In recent weeks, a slew of blue-chip firms have pointed to a patchy recovery.

China's use of ultra-long treasury bonds to fund a consumer goods trade-in programme deviates from the usual playbook of boosting investment to stimulate growth.

Consumer spending, a key driver of China's economy, has been weak.

Retail sales fell 1.1% in July from a year earlier, the fourth straight monthly decline.

Auto sales, a bellwether for consumer confidence, plunged 9.7% in the first seven months of 2023.

Earnings per share for Chinese companies are expected to fall 10% in 2023, according to Refinitiv data.

This is a sharp reversal from the 30% growth seen in 2021.

The weak earnings outlook is weighing on Chinese stocks.

The CSI 300 index of China's largest companies has fallen 15% year-to-date.

The Hang Seng Index of Hong Kong-listed Chinese companies has fallen 20% year-to-date.

Conclusion

The current earnings season is a reminder that China's economic recovery is still a long way off.

Investors should be cautious about buying Chinese stocks until there is more evidence of a sustained recovery in consumer spending and corporate earnings.