China Earnings Pose Risks to Nascent Rebound in Onshore Stocks

Chinese corporate earnings for Q2 are projected to show slowed or stagnant growth, driven by escalating US trade tariffs, which threatens the nascent rebound in onshore stocks. China International Capital Corp. forecasts profits grew slower than Q1's 3.5% year-on-year, while Bloomberg data reveals CSI 300 earnings estimates for the next 12 months have declined over 1% since March 31, suggesting a challenging reporting season for investors.

Analysis

The outlook for Chinese corporate earnings is deteriorating, presenting a significant risk to the nascent rebound in the country's onshore stock market. Profit growth for the second quarter is projected to have slowed or stagnated, falling below the 3.5% year-on-year pace recorded in Q1 2025, according to China International Capital Corp. This deceleration is largely attributed to the economic pressure from escalating US trade tariffs. Underscoring this pessimistic view, forward-looking earnings estimates for members of the CSI 300 Index have been revised downward by over 1% since March 31, reversing a two-quarter trend of positive revisions. This combination of slowing realized growth and negative analyst revisions suggests the upcoming earnings season is unlikely to provide a positive catalyst for Chinese equities.

Key Decisions for Investors

• Investors should adopt a cautious stance towards Chinese onshore equities, as the upcoming earnings season is poised to be a headwind rather than a catalyst for the market.
• Consider reducing exposure to sectors most sensitive to US tariffs and scrutinize company balance sheets for resilience against slowing growth.
• Monitor corporate guidance during the Q2 reporting season closely for any signs of margin compression or deteriorating demand before making significant capital allocation changes.
• A material improvement in the outlook would likely require a de-escalation of trade tensions or unexpectedly resilient earnings, making any US-China trade developments a key variable to watch.