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As US companies were reporting their earnings this week, China held its fourth plenum, at which members of the Communist Party’s Central Committee met. Photo: Reuters
Opinion
Hannah Anderson
Hannah Anderson

What US earnings season and China’s fourth plenum have in common

  • Both corporate leaders and China’s Central Committee must answer the question of whether they can continue to deliver high growth
  • However, while American company earnings and China’s economic growth face many similar challenges, they are on different trajectories
Hannah Anderson
Hannah Anderson
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Annual meetings provide an opportunity to check the progress of key initiatives and set priorities in the coming year. Today, two particular sets of these type of meetings deserve special attention, for interrelated reasons.

The US third quarter earnings season is well under way, with its associated gatherings of investors. China’s fourth plenum took place this past week as well. Though these meetings serve different purposes, the leaders involved in each faced the same essential question: can you continue to deliver the high growth you have in the past?

Profits of large multinational companies and economic growth in the world’s second-largest economy are obviously different things. However, the answer to this key question is much more closely intertwined than simply how much revenue US firms can generate in China.

Checking in on recent progress reveals that China’s growth and corporate earnings face some of the same immediate challenges – weakening global demand, a troubled manufacturing sector, trade-war-linked uncertainty – and, in the near term, both are likely to see a small bump as these headwinds fade somewhat. However, in the long run, earnings and China’s growth are on fundamentally different trajectories.
Earnings are highly cyclical. Although US-domiciled firms derive around 40 per cent of their revenues from abroad, the rise and fall of the US business cycle is closely correlated with the rise and fall of earnings. Over the next several years, US earnings are likely to continue to respond to the vagaries of the country’s economic position.

This is not the same as earnings growing at the same pace as gross domestic product. The US economic growth trend is likely to remain at a low level compared to its own history while earnings will continue to over- and undershoot domestic economic growth and companies will leverage their increasing international exposure to push profits higher.

China’s growth is unlikely to experience the same rapid acceleration and deceleration. Structurally, China’s economic growth is slowing. Real GDP growth is likely to average 4.4 per cent per year over the next 10 to 15 years. This is large step down from the more than 7 per cent average achieved over the past 10 years.

As China enters the middle-income group of countries, typically defined as having an annual per capita GDP in excess of US$10,000, which seems almost to certain happen this year, officials’ focus is shifting from the absolute rate of growth to the distribution of growth. Income per capita is the indicator to watch. Such growth is likely to continue in line with the authorities’ goals.
People visit the first Costco outlet in China on the store’s opening day in Shanghai in August, 2019. Photo: AFP

Goal setting is the most important aspect of annual meetings. Not only can it guide us to what we should pay attention to over the coming years, it also defines the objectives business and political leaders will work towards. Though China’s fourth plenum was ostensibly focused on the political work of the Communist Party, its economic goals certainly received some attention, too.

China sends top financial officials to clean up debt-laden provinces

This annual gathering of hundreds of top Chinese leaders was closely watched for signs of new momentum on China’s opening-up process and what steps Beijing might signal to keep down debt levels and grow the economy.

Chinese President Xi Jinping at the welcoming ceremony before the fourth plenum at the Great Hall of the People in Beijing. Photo: Reuters

A key question is whether China’s ruling apparatus can be scaled to keep up with the economy’s speed of change.

Raising incomes nationwide seems achievable, but the range of possible outcomes for China’s economy has widened. More aggressive reforms to the state sector and capital allocation could lift growth over the next 10 years, whereas continued overreliance on industries with slow productivity or untended debt could bring growth below my projections.

These are some of the questions that top policymakers met to discuss. These scenarios are also why annual meetings deserve our attention. The priorities established for China’s economic management will be reflected in future investment plans and the earnings expectations that large multinational corporations communicate in their earnings calls going forward.

Hannah Anderson is a global market strategist at JP Morgan Asset Management

This article appeared in the South China Morning Post print edition as: The common questions being asked at different meetings
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