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#MoneyBeat Chinese Corporate Profits Swell, But Outlook is Dimmer

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Profits at China’s largest publicly-listed companies last year grew at their fastest clip since 2010, but don’t expect a repeat in 2018.

Earnings per share of companies in the MSCI China index—which includes 152 large and mid-cap stocks mostly listed in China, Hong Kong and the U.S.—likely expanded by more than 26% in 2017, according to research from Nomura.

The big drivers were tech giants including Alibaba and Tencent, whose profits surged, as well as energy, industrial and real-estate companies that benefited from higher oil and property prices. The country’s top banks also did better thanks to strong interest-income growth. Some companies with March year-ends are yet to report.

China’s economy grew 6.9% last year, an expansion rate in line with previous two years but down from a more than 10% increase in 2010. That year, corporate earnings grew 34.3%.

Last year’s profit gains helped power a 36.7% increase in the MSCI China index, far exceeding the 18.8% increase in the broader MSCI Emerging Markets Index. Both investing benchmarks are tracked by many foreign investors.

Numerous industrial sectors were emerging from low or even negative profits in 2016, hence an “elevated” jump the following year, said Mixo Das, Asia portfolio strategist at J.P. Morgan.

Major state-owned enterprises benefited from Beijing’s heavy-handed campaign to tackle excessive capacity and curb supply in sectors including coal and steel last year, said Jacky Zhang, an analyst at BOC International in Shanghai.

Energy companies in particular benefited from higher oil prices: Prices for Brent crude futures have risen some 25% in the past year, according to Wall Street Journal data.

The earnings outlook for this year isn’t looking so robust.

The country’s crackdown on speculative investing, off-balance sheet lending and its campaign to reduce leverage in the financial system could dampen profit margins and growth opportunities for some companies.

An escalating trade war between the U.S. and China, meanwhile, has weighed on stocks in recent weeks. It’s too soon to gauge the impact on corporate earnings, as it remains unclear which tariffs will be enforced. But China’s planned 25% tariffs on selected U.S. goods would hurt 2.7% of the Asian country’s total imports, Morgan Stanleyid in a recent note.

Wendy Liu, Nomura’s head of China equity research, said she expects earnings at Chinese internet firms to grow 16% in 2018 after expanding the previous year.

Profits of hardware technology firms, meanwhile, could slow to 20% after surging 121% in 2017.

“There will likely be a moderation in top-line growth from 2017’s high base,” she said, noting that investments and expenses in tech are meanwhile likely to increase.

Beijing’s efforts to cut debt in the economy have forced some ailing or heavily-indebted firms out of the market, helping their rivals gain market share and pricing power, Ms. Liu said. Overall, she expects growth in earnings per share at companies in the MSCI China index to slow to 14.6% in 2018, and 16% next year.

Stella Yifan Xie and Gregor Stuart Hunter contributed to this article.

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