What Do Q3 Earnings of Two Of The Largest Chinese Financial Firms Tell Us About China's Economy Right Now?

Thursday, two of China’s largest financial institutions released third quarter earnings.

As for most financial firms, the earnings statements of China Construction Bank CICHY and China Life Insurance CILJF offer useful insight into what’ going on in the world’s second-largest economy, and what investors can expect next.

China Construction Bank said that for the third quarter this year it earned a net profit of 88.145 billion RMB ($12 billion) which was a 3% improvement over the year before. That beat analysts’ expectations by a wide mark, who were forecasting a 21% drop.

Analysts weren’t just looking for profit numbers this quarter, however – much more pertinent on the balance sheets of banks is the ratio of non-performing loans to assets. Those were pretty much flat at 1.37%. The total amount of NPLs on CCB’s balance sheet was 323 billion RMB however – about 9% higher than the same period last year.

Balancing that out was an 11.5% increase in customer deposits in the period, to 2.85 trillion RMB.

Overall CCB’s financials were more robust than expected, illustrating how bearish analysts have become lately on China’s economy. At the same time, the massive increase in customer deposits over the past year shows that it’s not just professional investors who are feeling skittish about the economy, but everyday savers too.

By contrast to CCB, for China Life, the company’s earnings couldn’t have gotten much worse. For the January-to-September period, China Life said it made a net profit of 16.2 billion RMB vs. 31 billion RMB in the same period last year, marking a 48% reduction in earnings-per-share. Return-on-equity, a measure of how well a company is putting its capital to use, was altogether wiped out in the same period.

China Life attributed most of the declines in its earnings to a flagging stock market, which it said put pressure on its investment income.

“In the first three quarters of 2023, as the momentum of economic upturn in China continued to consolidate, the recovery of the life insurance industry has sustained, but there were still uncertainties and complexities,” said China Life’s Management.

Looking into China Life’s core business more closely reveals that there is no abating in demand for insurance products among Chinese consumers, however: the value of new businesses brought in actually increased by around 14%, as did pretty much all the company’s revenue from premiums apart from health insurance, where there was a minor decline in the aftermath of Covid.

The Lowdown

What both companies’ earnings statements show is first, how robust the underlying conditions for China’s economy are, and second, how much effort is required to stimulate it back into something resembling market growth.

While savings and purchases are continuing along with broadly better-than-expected growth, a downturn in investment back into its own economy is depriving Chinese consumers of the kind of gains they have been accustomed to seeing in their portfolios the past decade or so. That means that valuations of companies are getting mauled, which in turn, is destroying overall investment growth.

So far, the Chinese government has launched a range of share buy-back funds and is also supporting a $56 billion regional government bond program to cover hidden debt lodged in the country’s flagging property markets, according to insiders who talked to China business daily Caixin.

Analysts now expect a continuation of intervention by the Chinese government in its own share and property markets until things improve, and the earnings of two of China’s biggest financial firms shows that’s probably right.