Latest data shows that profits for Chinese State Owned Enterprises (SOE’s) has fallen 22.8% YoY in the first seven months of 2009. In contrast, the stock market has rocketed higher YTD on economic growth expectations.
The decline in profit moderated in July, but still seems very much at odds with optimism in regards to China’s near-term growth. Profit also fell 2% in July from June, though the results of a single month might not be too dependable.
Margins appear to be clearly under pressure given profits fell by a higher percentage than revenue.
Alibaba: The SOEs’ operating revenue was RMB 11.64 trillion in the first seven months of this year, down 4.7% year on year. The operating revenue of the centrally-controlled enterprises decreased 3.6% year on year to RMB 7.38 trillion, while that of locally-administered state enterprises was down 6.6% from a year earlier and reached RMB 4.26 trillion.
This could be further evidence that China is stimulating GDP growth at the expense of profits, by pushing unprofitable economic decisions to be made. It’s worrisome since while uneconomic projects might make GDP data look good in the near term, such growth is illusory in the long term and actually destroys value. Measured in terms of profit, China’s SOE economy is declining. Hopefully for Chinese stock market investors, the private sector will deliver on expectations and pick up the slack.
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