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July 23, 2017

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China Inc. waves a red flag on economic recovery

HONG KONG -- Chinese corporate profits show no sign of a second-half recovery as analysts cut earnings estimates in September by the most in 2 1/2 years, a red flag for investors who expect the world's second biggest economy to start picking up soon.

China Inc. served as an early warning of the economic slowdown which began in 2011. Back then, slowing sales, swelling inventories and sluggish bill payments all pointed to declining demand and deteriorating cash flow, hallmarks of an economy that was losing steam.

Economists polled by Reuters think the third quarter probably marked China's trough — although many had made the same prediction about the first and second quarters too.

September trade figures released over the weekend were better than expected, however, raising some hopes that the economists might be right this time.

China will release its third-quarter gross domestic product data on Thursday.

Corporate profits still look lackluster at best. Inventories are slowly receding, but shipments remain weak, suggesting underlying demand remains subdued.

"GDP growth likely troughed in the third quarter but the Chinese economy is struggling to find another engine of growth," said William Fong, senior investment manager at Baring Asset Management in Hong Kong.

Analysts have cut estimates for Chinese companies in the MSCI China index every month since June 2011, according to Thomson Reuters I/B/E/S. September's revisions were the worst in 2 1/2 years after grim first-half report cards.

The earnings revision ratio for Chinese companies remains negative, indicating there are more reductions than upgrades, a trend that has been in place since the start of 2011, according to Thomson Reuters I/B/E/S.

During the last Chinese slowdown, after the Lehman Brothers bankruptcy triggered a global financial crisis, the CSI 300 index of the top Shanghai and Shenzhen listings bottomed out in November 2008, but economic growth did not start to rebound until the June quarter of 2009.

Last month, the CSI 300 index hit its lowest level since early 2009, and has struggled to regain ground since.

Infrastructure-linked companies such as steel makers were among the first to recover after the global financial crisis because Beijing responded with a 4-trillion-yuan (US$638.24 billion) stimulus package.

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