By Wang Yiming, Chen Changsheng & Yang Guangpu

Research Report Vol.21 No.6, 2019

The Development Research Center of the State Council recently conducted a nationwide survey of companies through the Company Questionnaire Survey System. The survey, aimed for a better understanding of corporate business operation in the third quarter and a more accurate analysis of macroeconomic conditions, received a total of 9,932 valid responses. Findings showed that the general business operation of companies remained stable, with the tax and fee reduction policy continuing to be effective and orders and operating income maintaining a certain growth rate. Nearly half of the responding companies reported their plan to increase investment in the future. However, challenges remained prominent in some regions, sectors, and companies, as they strived to deal with a narrower profit margin, a heavier pressure on rightsizing, and the long-term difficulty in financing. Some companies faced a higher leverage ratio and others felt more keenly the impact of the ongoing Sino-US trade friction. As a result, there was no significant improvement in terms of corporate expectations of future development prospects.

I. More Companies were Suffering from a Decline in Operating Income and Profit Margin generally remained Low

Some companies reported a decline in operating income. 50.4% of the responding companies reported an increase in operating income in the third quarter compared with the same period of the previous year, while 24.0% reported a decrease (Figure 1). In most cases, the decrease was within 10% (Figure 2). In terms of geographical distribution, 30.7% of the responding companies in Northeast China reported a decline in operating income, the highest in China. With only 36.4% of the companies reporting an increase, the overall growth rate in this region was only about 0.2%. In terms of business scale, the smaller the companies were, the more likely they were to suffer a decline. This was especially true for the companies with a total asset of less than RMB 1 million. In this group, more companies reported a decline than an increase in operating income (Figure 3).

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Profit margin was less than that of the second quarter. Analysis showed that in the third quarter, 48.0% of the companies reported a profit margin of less than 5% (including negative margin) and 31.9% reported a profit margin between 5% and 10%, up 6.0 and 4.1 percentage points from the previous quarter respectively. Companies registering a profit margin of 10%-20% and over 20% accounted for 14.2% and 6.0% respectively, down 6.4 and 3.6 percentage points from the previous quarter (Figure 4). According to preliminary estimates, the overall profit margin in the third quarter was 6.48%.

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II. Companies were Receiving more Orders but Imbalance Between Regions and Companies remained Prominent

In the third quarter, 39.2% of the responding companies reported an increase in orders, up 15.4 percentage points from the second quarter. Among them, 12% reported an increase of more than 10% and 27.2% reported an increase of less than 10%, up 3.7 and 11.7 percentage points from the second quarter (Figure 5). 28.9% of the responding companies reported a decline in orders, almost the same rate as in the second quarter. According to preliminary estimates, orders rose by 0.7% compared with the same period of the previous year and grew by 1.3% from the second quarter, indicating that the downward pressure may be eased in the fourth quarter.

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In terms of geographical distribution, Southwest China registered the most considerable improvement in orders, with 50.2% of the companies reporting an increase while only 20.1% indicating a decline. In contrast, conditions in Northeast China further deteriorated, with only 25.5% of the companies indicating an increase and 35.3% reporting a decrease (Figure 6). In terms of their registered ownership type, 48.4% of central state-owned companies and 46.8% of local state-owned companies reported an increase in orders. For private enterprises, foreign-funded enterprises, and enterprises of other types, those reporting an increase in orders only accounted for 37.2%, 36.1%, and 28.0%, respectively, and those reporting a decline accounted for 30.4%, 37.9%, and 34.8%, respectively (Figure 7). In terms of business scale, larger companies generally faced better prospects in terms of incoming orders while small and micro enterprises faced the bleakest conditions. In the group of companies each with a total asset of less than RMB 1 million, only 20.7% reported an increase in orders while as many as 39.4% reported a decrease (Figure 8).

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III. Sino-U.S. Economic and Trade Frictions have Increased Pressure on Chinese Exporters to share the Burden of Tariffs, but the Impact on China’s Supply Chain Remained largely Unchanged

Exporters to the United States were more or less exposed to higher pressure to share the burden of tariffs. Our survey in the third quarter showed that 68.5% of the 4274 exporting companies had export business with the United States. Among them, 35.2% bore half or more of the US levied tariffs and 5% bore all the tariffs levied by the US (Figure 9). There was no significant difference in terms of the sharing ratio of US levied tariffs among the exporters to the US in different regions and industries and of different types of ownership and scales.

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There was no sign showing that the impact of Sino-US economic and trade frictions on China’s supply chain had significantly expanded. Our survey of the third quarter showed that 24.5% of the companies believed that their supply chain was quite seriously affected by the frictions, while 75.5% reported that their supply chain had not been affected or seriously affected yet. Figures remained largely the same as in the second quarter (Figure 10).

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