💾 Archived View for gmi.noulin.net › mobileNews › 2726.gmi captured on 2021-12-05 at 23:47:19. Gemini links have been rewritten to link to archived content
⬅️ Previous capture (2021-12-03)
-=-=-=-=-=-=-
Sales are soaring; margins are meagre
Dec 9th 2010 | HONG KONG | from PRINT EDITION
BUSINESS in China is about three things: volume, volume and volume. Or so many
analysts believe. So as the revenues of Chinese companies soar, rosy forecasts
abound. Goldman Sachs, an investment bank, predicts that the prices of the
shares of Chinese companies trading in Hong Kong will shoot up by 30% next
year. Nomura, another bank, says they will rise by more than 20%.
Besides heady revenue growth, China bulls cite two reasons for optimism.
Chinese firms are cheaper than they have been in the past and cheaper than
similar companies in other parts of the world. Also, Chinese shares did badly
this year. A catch-up is imminent, say the bulls.
Are they right? Another possibility is that Chinese stocks are cheap because
the market has spotted some serious underlying problems. Here s one: as
revenues soar, profit margins are falling (see chart). Sales rose by a
staggering 42% year-on-year in the first half of 2010. That was partly because
the first half of 2009 was dreadful, but sales will still rise by an impressive
23% in the second half of 2010, predicts Macquarie Securities, a broker. Yet
margins have been on a protracted slide that shows no sign of stabilising, says
Michael Kurtz, Macquarie s Asia strategist. Normally they rise by 1.5% in the
first half of the year because of seasonal factors, but that did not happen in
2010.
In some industries conditions are horrible. Exporters margins are often less
than 2%, if China s minister of commerce is to be believed. Firms in the
southern Chinese manufacturing belt are being painfully squeezed. A shoe
exporter who recently returned after a long absence found his old Taiwanese
suppliers had all left, having been crushed by rising costs. In their place
were tough locals who demanded the full price for their products regardless of
glitches. The shoe exporter has been threatened, and is thinking of hiring a
bodyguard. His tale is far from unique.
The Chinese government is phasing out subsidies to industry and relaxing
energy-price controls. Workers are demanding higher salaries. Environmental
standards, too, are being tightened. All these trends hurt profits, yet the
government is happy for them to continue. This is a self-inflicted
margin-reduction, Mr Kurtz says.
The government wants to allow ordinary people to enjoy more of the fruits of
growth. Happy citizens are less likely to riot or demand the right to vote, it
assumes. How far it will go remains to be seen, however. Will it allow the
(artificially low) interest rates that banks pay depositors to rise? That would
reduce the transfer of wealth from savers to well-connected corporations, which
enjoy cheap credit. Will it allow the yuan to appreciate, thus walloping
exporters but boosting consumers spending power? As usual in China, no one
knows.