China's industrial sector posted a solid profit gain in September, but the strength was narrowly concentrated in AI-related industries, while broader manufacturing struggles persist. Meanwhile, HSBC's impressive earnings beat failed to impress investors, as the bank left its outlook unchanged.
China's Industrial Profits: A Tale of Two Sectors
Profits at China's large industrial firms rose 14.4% year-over-year in September, according to official data. The surge was largely powered by businesses tied to artificial intelligence. Optical fiber makers saw earnings jump sixfold so far this year, while chipmaking equipment manufacturers reported profit increases of over 50%. Copper and aluminum producers also fared well, with profits up around 45%, buoyed by AI demand, renewable energy projects, and higher commodity prices.
However, the gains were not widespread. Car manufacturers, clothing producers, and furniture makers all struggled with rising costs and cautious consumer spending. This divergence highlights the uneven nature of China's economic recovery, where high-tech industries boom while traditional manufacturing lags.
The stock market has taken notice. The CSI 300 index, which tracks the largest listed companies in Shanghai and Shenzhen, officially entered a bear market last week, falling 20% from its June highs. Disappointing earnings from consumer and tech firms, coupled with a global selloff in AI stocks, have rattled investor confidence.
HSBC's Profit Jump Fails to Lift Shares
In a separate development, HSBC, Europe's largest bank by assets, reported a 32% jump in pre-tax profit to $9.6 billion for the third quarter. The bank benefited from higher lending income, lower provisions for bad loans, and a $1 billion reduction in costs, partly due to the absence of last year's hefty legal expenses. It also announced a fresh $1 billion share buyback, matching analyst expectations.
Yet investors were unimpressed. HSBC's shares fell 5% on the news, deepening their monthly decline to nearly 15%. The reason: the bank did not upgrade its full-year outlook. Investors had hoped that with interest rates expected to rise in Hong Kong and the UK—two of its key markets—and costs falling, HSBC would raise its guidance. When it didn't, a strong quarter suddenly seemed like a letdown.
This reaction underscores a key market principle: stock prices often move based on expectations, not just results. A company can beat earnings estimates, but if investors were hoping for even better news, the stock can still fall.
What It Means for Investors
For investors in Chinese equities, the current environment is challenging. The CSI 300's bear market reflects broader concerns about earnings quality and economic momentum. Analysts at Morgan Stanley warn that Hong Kong-listed stocks could drop another 10% to 15%, and they favor mainland firms with stronger AI exposure and state support. History offers some comfort: Chinese stocks have often started to rise within a couple of months of state buying and official promises to stabilize markets.
Indeed, billions have flowed into exchange-traded funds favored by China's state-backed investors, a sign that authorities are trying to steady the market. However, buying shares won't fix the underlying earnings problem. As Theodora Lee Joseph, a CFA analyst, notes, big Chinese firms have missed profit forecasts by an average of 9%, prompting analysts to slash estimates for the year, especially for Hong Kong tech stocks.
For HSBC investors, the lesson is about the importance of guidance. The bank's decision to hold its outlook steady suggests management sees no reason to raise expectations, possibly due to uncertainties in the global economy. With AI-powered assistants like Meta's Muse potentially helping savers find better rates or move their cash, banks' easy profit streams from idle deposits could face disruption. This is a long-term risk that investors should monitor.
In the near term, all eyes will be on upcoming economic data and corporate earnings to gauge whether China's AI-driven industrial boom can broaden, and whether HSBC's caution is justified. As always, diversification and a focus on fundamentals remain key strategies for navigating these uncertain markets.
