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China economy
OpinionComment
Hannah Anderson
Hannah Anderson

What US earnings season and China’s fourth plenum have in common

  • Both corporate leaders and China’s Central Committee must answer the question of whether they can continue to deliver high growth
  • However, while American company earnings and China’s economic growth face many similar challenges, they are on different trajectories

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As US companies were reporting their earnings this week, China held its fourth plenum, at which members of the Communist Party’s Central Committee met. Photo: Reuters
Hannah Anderson

Annual meetings provide an opportunity to check the progress of key initiatives and set priorities in the coming year. Today, two particular sets of these type of meetings deserve special attention, for interrelated reasons.

The US third quarter earnings season is well under way, with its associated gatherings of investors. China’s fourth plenum took place this past week as well. Though these meetings serve different purposes, the leaders involved in each faced the same essential question: can you continue to deliver the high growth you have in the past?

Profits of large multinational companies and economic growth in the world’s second-largest economy are obviously different things. However, the answer to this key question is much more closely intertwined than simply how much revenue US firms can generate in China.

Checking in on recent progress reveals that China’s growth and corporate earnings face some of the same immediate challenges – weakening global demand, a troubled manufacturing sector, trade-war-linked uncertainty – and, in the near term, both are likely to see a small bump as these headwinds fade somewhat. However, in the long run, earnings and China’s growth are on fundamentally different trajectories.

Earnings are highly cyclical. Although US-domiciled firms derive around 40 per cent of their revenues from abroad, the rise and fall of the US business cycle is closely correlated with the rise and fall of earnings. Over the next several years, US earnings are likely to continue to respond to the vagaries of the country’s economic position.

This is not the same as earnings growing at the same pace as gross domestic product. The US economic growth trend is likely to remain at a low level compared to its own history while earnings will continue to over- and undershoot domestic economic growth and companies will leverage their increasing international exposure to push profits higher.

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