China's Profit Warnings Signal More Gloom for the Economy

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Of the more than 1,600 firms to give first-half guidance, 40% have predicted a drop in earnings from a year earlier, according to data compiled by Bloomberg. That’s the most since 2016 in terms of companies reporting smaller profits, deeper losses or swings into loss.


Chongqing Changan Automobile Co. expects to swing to a loss of as much as 2.6 billion yuan ($378 million) on declining sales. Shenyang Machine Tool Co. blamed China-U.S. trade tensions for an expected 1.5 billion yuan first-half loss after reporting a profit a year earlier. Shares of Dong-E-E-Jiao Co., a maker of traditional Chinese medicine, had their biggest two-day drop since 2015 after preliminary earnings showed a 79% slide in the first half.

The warnings indicate pain is spreading across the economy after domestic output expanded at the slowest pace on record in the second quarter. A gauge of China’s factory activity has shown a contraction in every month but two this year, although data Wednesday showed a slight improvement in July from the previous month. The Shanghai Composite Index retreated 0.7% at the close.
While more than half of companies expect earnings to improve, the warnings follow a flood of alerts issued earlier this year on 2018 profits. Consumer discretionary and media companies are poised to suffer the most with combined profits in the two sectors plunging at least 38% from a year earlier.

“The sluggish broader economy has left many firms in a bad state, and they are unable to reverse the situation at the moment,” said Sun Jianbo, president of China Vision Capital Management Co.