The outlook for Chinese stocks is growing gloomy amid a deteriorating corporate earnings picture, prompting investors to be wary that spending during the Lunar New Year holiday may not be enough to reignite the rally.
Preliminary corporate earnings reports indicate a significant decline in the final quarter of 2025, according to an analysis by Morgan Stanley. Furthermore, the latest economic indicators confirm weak consumer demand as some government stimulus programs are scaled back, according to Nomura Holdings.
These factors are fueling concerns that the nine-day holiday will fail to deliver its usual boost to profits, at a time when economic uncertainty continues to undermine consumer spending.
Risk aversion and a lack of catalysts are hindering Chinese stocks.
“Sentiment towards Chinese stocks is weak,” said V-Sern Ling, managing director at Union Bancaire Privee in Singapore. He added that this is partly due to investors’ risk aversion ahead of the long holiday season, as well as the lack of new catalysts, the apparent recent increase in regulatory scrutiny, and continued intense competition.
The MSCI China index has risen by only 0.8% since the start of the year, compared to gains of 2.8% for the MSCI World index. The divergence is even more pronounced within Asia, with South Korea's main index surging 31% and Taiwan's index climbing 16%.
Earnings season in China already looks disappointing. Preliminary fourth-quarter filings from more than 2,000 mainland-listed A-list companies show that negative warnings outweighed positive ones by a net 14.8%, compared with a net negative of 4.8% in the second quarter, according to Morgan Stanley. Smaller companies were the worst performers, particularly in the real estate and consumer-facing sectors, according to a note this month from strategists including Chloe Liu and Laura Wang.
China's slowing economic growth is putting pressure on corporate profits.
Slowing economic growth is a major factor putting pressure on profits. Growth in China slowed to 4.5% in the last quarter compared to the same period of the previous year, the weakest pace since the country reopened after COVID lockdowns in late 2022. Producer prices also fell by 1.4% year-on-year in January, continuing a deflationary trend that began in late 2022, while purchasing managers' indices pointed to an unexpected slowdown.
“The sharp decline in both the manufacturing and non-manufacturing purchasing managers’ indices points to weak underlying demand,” said Lu Ting, chief China economist at Nomura in Hong Kong, this month. “Consumption is facing clear headwinds as a result of the tapering of the goods-substitution stimulus program this year.”
