China earnings miss casts doubt on Xi’s bid to end deflation

BEIJING – Beijing’s campaign to rein in price wars and blunt deflation has done little to lift third-quarter earnings, leaving investors short on catalysts as Chinese stocks extend their losses into a second month.

Members of the MSCI China Index recorded a 1.1 per cent negative earnings surprise for the July-September quarter, continuing weakness from the previous quarter, according to Bloomberg Intelligence. Disappointing results in the real estate and consumer sectors outweighed positive surprises in materials and financials. The findings were based on results from companies accounting for 97 per cent of the index’s market capitalisation.

Analysts say China’s months-long “anti-involution” drive to curb excessive competition has had limited success outside of a select number of sectors like materials in easing deflationary pressures or boosting profitability. Industrial profits have also resumed declines after a short-lived rebound, weighing on earnings outlook. 

“Earnings recovery will be critical in 2026 given that much of the rally in 2025 has been valuation driven,” according to Bloomberg Intelligence analyst Marvin Chen, adding that anti-involution measures will likely play a bigger role in 2026.

Price wars and reduced government subsidies were major factors that hurt electric vehicle (EV) makers’ bottom lines in the quarter, with Li Auto, Nio and Xpeng all recording revenue and vehicle delivery forecasts that missed estimates. While Xiaomi’s EV division and Geely Automobile Holdings recorded strong growth, both face margin risks on the back of scaled-back tax incentives.

Materials firms, meanwhile, had a breakout year thanks to a surge in gold prices. Zijin Mining Group, one of the world’s biggest producers, posted a 57 per cent jump in net income, while that of Jiangxi Copper increased by 35 per cent. Though solar companies saw a small earnings improvement, many remain deep in loss-making territory. Longi Green Energy Technology, for example, narrowed losses in the third quarter.

The softer results come after investors bid up a number of sectors in the hope that the anti-involution pledge by Chinese President Xi Jinping would result in a corporate earnings turnaround. Those same investors are now grappling with limited progress in the country’s fight against deflation.

That said, new measures by China to boost spending and spur economic growth may provide some upside relief for sectors. JPMorgan Chase analysts wrote in a Nov 17 report that luxury property sales bucked the weakness and that a K-shaped consumption recovery is emerging, favouring the premium luxury sector. 

Still, even earlier drivers of market gains are losing steam. Technology shares, which benefited from profit forecast upgrades earlier in 2025, are facing a reality check with lukewarm third-quarter results. Alibaba Group Holding saw profits plunge as spending on consumer subsidies and data centres surged, while Baidu posted its steepest quarterly revenue drop on record, highlighting weakening advertising business and costly bets on artificial intelligence. 

Any bullish outlook for MSCI China earnings hinges on expectations that e-commerce firms’ growth will accelerate in 2026 as price wars ease, Morgan Stanley analyst Laura Wang wrote in a Nov 25 note. Year-end and 2026 guidance will be critical to watch, she added, warning that weak consumption could curb discretionary spending until clearer signs of stabilisation emerge. BLOOMBERG