Chinese firms' low profit margins face new risks from Trump tariffs

Chinese firms are mostly less profitable than comparable US companies, leaving exporters at risk of a further hit to earnings as President Donald Trump’s tariffs sap demand, according to new research from Bloomberg Economics.

 

While Chinese companies can defend their “razor-thin margins by leveraging their market dominance” in the short term, at some point US customers will have to raise prices in response, wrote Bloomberg’s China economists Chang Shu and David Qu.

 

“Tariffs will eventually pass through to consumers, weighing on demand — a pattern seen in the first trade war in the late 2010s,” they said. “The hit could be even harsher this time, as tariffs are broader and US restrictions on transshipments stricter.” 

 

 

Thinner profitability will likely make the US even less of a draw for Chinese exporters, as American consumers show signs of moving away from products most directly exposed to tariffs. China’s shipments to the US have already seen five months of double-digit declines, a slump more than offset by improved sales in other major markets.

 

The net profit margins of US listed companies in tradeable goods averaged around 12 per cent last year, more than double the 4.9 per cent of their Chinese peers, according to the research from Bloomberg Economics.

 

Nearly 30 per cent of sectors in the US have profit margins more than 10 per cent higher than their Chinese competitors, it showed. 

 

Bloomberg Economics found that US communications and technology hardware firms report profit margins over 20 per cent, compared with around 3 per cent for Chinese businesses. The gap is also wide for builders and makers of household products. 

 

Chinese companies have reacted to weak demand at home by cutting prices and exporting more around the world, although that isn’t likely to boost overall profits. 

 

Data out over the weekend showed profits of large Chinese industrial firms in the first eight months of this year were up less than 1 per cent from last year. While earnings jumped in August, economists have attributed it in part to a low base of comparison last year. 

 

In the year through July, 29 per cent of these firms were making a loss, Bloomberg analysis of the official data shows, the same level as last year’s record.