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The full extent of China’s economic slowdown will be exposed this week in anticipation of underwhelming corporate earnings reports and companies downgrading their outlooks, especially in the troubled real estate sector.

The second-quarter results come as a worsening liquidity crisis for property developers and shaky local government finances fuel investors’ doubts over whether Beijing will unleash a stimulus massive enough to bring the world’s second-largest economy back to normal. Legit doubts.

The gains will also provide an important data point for global markets, as the release of Chinese economic statistics comes under greater scrutiny following Beijing’s decision this month to stop releasing data on youth unemployment.

“Next week, we may see less encouraging performance data from China,” said Jinge Liu, chief China equity strategist at Goldman Sachs, which recently cut its full-year EPS growth forecast to 11% from 14%. .

“Fundamentally, we are very confident that without a larger policy response, the situation in the financial and real estate sectors will become more challenging,” Liu said. “This remains largely the key variable driving equity returns.”

Expectations of further downward revisions to the business outlook are partly a matter of time. Many of the groups that have already reported this quarter are from the consumer and technology sectors, which have benefited the most from China’s reopening after strict coronavirus restrictions.

Those are roughly in line with the consensus forecast of analysts surveyed by Bloomberg, which expects earnings per share of companies included in the MSCI China stock index to rise about 18% in 2023.

Stock index line chart (rescaled to 100) shows Chinese stocks lagging global peers as growth disappoints

In contrast, listed companies releasing earnings this week are more concentrated in industries that have faced enormous pressure this year, such as real estate, heavy industry and finance. The most prominent banks include Industrial and Commercial Bank of China, the country’s largest by assets; Country Garden, once the largest developer in China by sales; and infrastructure group China Communications Construction.

Earnings expectations have been trending lower for the past two months as developer and investment group Zhongzhi failed to make payments. Zhongzhi is one of the largest players in China’s nearly $3 trillion shadow financing market.

Morgan Stanley on Friday cut its 12-month forecast for the MSCI China index to 60 points, just above current levels, with the benchmark down more than 7% this year. Analysts at the bank said the move was partly due to “significantly lower earnings expectations for 2023”, with annual earnings growth expected to be just 2%.

So far this month, overseas net sales of Shanghai and Shenzhen-listed shares sold through Hong Kong’s Stock Connect program have exceeded Rmb73. A surge in capital inflows triggered by growth. Policy Support.

Strategists such as Frank Benzimra, head of Asia equity strategy at Societe Generale, expect more earnings downgrades in the coming week to further lower expectations.

“The consensus (18 percent) is pretty high given our lackluster (economic) growth this year,” Benshimla said. “It is more realistic to expect earnings growth of between 8% and 12% this year.”


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