The on-going non-stop weakness in Chinese equities have been a recurring theme here.
We have noted that, first of all, there is nothing particularly out of ordinary regarding the poor performances of equities if one compared Chinese equities with other stock market bubbles.
We have also noted that corporate profits have been quite weak. Profit warnings filed with Hong Kong stock exchange, for instance, reached record high for the first half earnings season.
The chart below from Goldman Sachs illustrates the point perfectly. It shows that for A-share companies (CSI 300) which have reported their second quarter earnings, earnings growth on a year-on-year basis for second quarter of 2012 is now hugely negative if we exclude the financials. Meanwhile, profits for MSCI China in the first half increased by a mere 1% yoy, or –5% yoy when financials are excluded.
Photo: Goldman Sachs
Consistent with our view that over-investment eventually leads to low return on investment and poor corporate profitability, this is one of the clearest figures which illustrates the point. With poor earnings growth, it is becoming even less surprising that Chinese equities have become among the worst performers.