China's $3.5 Trillion Stock Rout Deepens Amid Sinking Corporate Profits

China's equities market, the world's second-largest, has experienced a $3.5 trillion loss in value since its peak in May, according to data compiled by Bloomberg. The rout intensified last week, pushing the onshore benchmark CSI 300 Index into a bear market and causing a technology sector gauge in Hong Kong to erase all gains made since Beijing's growth support package two years prior. This deepening selloff is driven by pervasive pessimism as investors confront an economy weak enough to erode corporate profits but not to trigger forceful new stimulus measures.

At the core of this investor gloom is a realization that a protracted consumption slump and intense competition among businesses are significantly impacting earnings across various industries, including banks, electric car manufacturers, and AI model developers. Ulrich Urbahn, head of multi-asset strategy and research at Berenberg, stated that "it is too early to conclude that the worst is over," emphasizing that the primary concern remains profitability, as China's strength in production and exports is not consistently translating into stronger domestic demand, pricing power, and corporate earnings.

The third-quarter reporting season has started disappointingly. Battery giant Contemporary Amperex Technology Co. Ltd. (CATL) reported a profit miss, symptomatic of both weak demand and fierce competition. Consensus 2026 earnings forecasts for MSCI China Index members have declined by over 4% since the end of March, with Hang Seng Tech Index profit projections plunging more than 13% during the same period, Bloomberg data shows. Even against lowered expectations, MSCI China constituents that have released results missed consensus forecasts by an average of 9%, marking the second-worst quarterly miss in two years. Notably, AI infrastructure builder China Mobile Ltd.'s January-September net profit tumbled 8% year-on-year due to cost pressures, and major materials firm Ganfeng Lithium Group Co. missed estimates due to falling prices. Jason Lemire, chief investment officer at Bold Wealth Partners, cited CATL as a "poster child" of cut-throat competition and margin squeeze.

This earnings pressure has left companies, particularly internet behemoths funding costly AI infrastructure, increasingly short on cash, forcing some, like Alibaba Group Holding Ltd., to conduct $10 billion follow-on stock sales, further diluting share value. Weakening investor confidence is also reflected in onshore stock market turnover, which is near its lowest level since July last year, and margin trades, which are at a one-year low. While authorities have mobilized state funds, known as the national team, to prevent further spirals, skepticism remains that these efforts are temporary fixes. Bridgewater Associates’ China arm, however, turned "prudently optimistic," citing liquidity-driven declines and non-high valuations.

China's third-quarter gross domestic product grew 4.5% from a year ago, bringing the expansion for the first nine months within the government's annual goal of 4.5%-5%. This target-meeting performance provides policymakers with reason to maintain a "drip-feed style" of growth support, according to William Bratton, head of cash equity research for Asia Pacific at BNP Paribas, who noted that policymakers are comfortable with the nature of economic growth and show no urgency for large-scale fiscal measures to promote consumption.

What to watch: Further economic data and any shifts in China's stimulus policies.

Editor's note: The draft thoroughly covers the market data, corporate performance, and expert analysis provided in the source text.