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What Do Q3 Earnings of China’s Largest Financial Firms Reveal About the Current State of China’s Economy?

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Thursday marked the release of third-quarter earnings reports for two of China’s largest financial institutions. China Construction Bank (CICHY) and China Life Insurance (CILJF) offered valuable insights into the current state of the world’s second-largest economy and what investors can expect moving forward.

China Construction Bank Beats Expectations with Strong Q3 Performance

China Construction Bank reported a net profit of 88.145 billion RMB ($12 billion) for the third quarter, a 3% improvement compared to the previous year. This exceeded analysts’ expectations, who had predicted a 21% decline. While profit numbers were important, analysts were also closely monitoring the ratio of non-performing loans to assets, which remained relatively flat at 1.37%. However, the total amount of non-performing loans on CCB’s balance sheet increased by 9% to 323 billion RMB compared to the same period last year. On the bright side, customer deposits saw an 11.5% increase, reaching 2.85 trillion RMB.

Overall, China Construction Bank’s financials surpassed expectations, challenging the prevailing bearish sentiment towards China’s economy. The significant increase in customer deposits highlights a growing unease among everyday savers as well as professional investors.

China Life Insurance Faces Challenges in Q3

In contrast to China Construction Bank, China Life Insurance experienced a significant decline in earnings. The company’s net profit for the January-to-September period was 16.2 billion RMB, a 48% reduction compared to the same period last year. Return-on-equity, a crucial measure of capital utilization, was completely wiped out during this period. China Life attributed most of the decline to a struggling stock market, which impacted its investment income.

While China Life’s core business witnessed an increase in the value of new businesses brought in, along with revenue from premiums (excluding health insurance), demand for insurance products among Chinese consumers remains strong. The company experienced only a minor decline in health insurance revenue due to the lingering effects of Covid-19.

The Lowdown: Insights from the Earnings Statements

The earnings statements from both companies reveal two key observations. First, the underlying conditions for China’s economy remain robust. Despite broader-than-expected growth, a decrease in domestic investment is depriving Chinese consumers of the significant gains they have become accustomed to in their investment portfolios. Consequently, valuations of companies are plummeting, resulting in an overall decline in investment growth.

To address this, the Chinese government has initiated various interventions, such as share buy-back funds and a $56 billion regional government bond program aimed at tackling hidden debt in the struggling property markets. Analysts predict that these government interventions will continue until the situation improves, as evident from the earnings reports of two of China’s largest financial firms.

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