Profits at onshore-listed Chinese companies climbed 25.7% in the three months to June from a year earlier, the fastest pace in nearly half a decade, according to China International Capital Corp. But the CSI 300 Index has slipped about 9% this quarter.
Stock market information on display in Beijing (Courtesy: Reuters photo for representation)
China’s best profit growth in five years hasn’t been enough to reignite a stock rally, with a weak economy and doubts over AI returns sapping investor enthusiasm.
Profits at onshore-listed Chinese companies climbed 25.7% in the three months to June from a year earlier, the fastest pace in nearly half a decade, according to China International Capital Corp. But the CSI 300 Index has slipped about 9% this quarter, and the tech-heavy Star 50 Index has tumbled 29%.
One reason is that much of the optimism may already be priced in. The STAR 50 Index surged 76% in the quarter to June and the broader CSI 300 gained 12%, setting a high bar for earnings to propel shares even further.
The disconnect also reflects a weak economy. Domestic demand remains sluggish, the property sector is mired in a prolonged downturn and expectations for a major policy response from Beijing are low. Meanwhile earnings growth has been concentrated in a handful of sectors, limiting the boost to the broader market.
Even favored companies such as memory chip giant CXMT Corp. have struggled to turn surging profits into sustained share-price gains. With AI stocks near record highs and new listings competing for liquidity, investors want more evidence that heavy spending on the technology will deliver lasting returns.
“Strong numbers no longer work for tech,” said Vey-Sern Ling, a managing director at Union Bancaire Privée. “Investors are concerned about longer-term sustainability of earnings, given uncertainty over AI investment, unclear return on investment and rising financing costs.”
CICC’s earnings data indicate that the gain was heavily driven by AI-linked companies. A breakdown from UBS Securities shows profits jumped 42% on the ChiNext board and 370% on the Star board, far outpacing the main board, which spans a broader range of industries.
Yet even standout earnings aren’t boosting shares. CXMT reported revenue growth that beat analysts’ expectations, but its stock fluctuated. Others such as Hygon Information Technology Co., Cambricon Technologies Corp. and Eoptolink Technology Inc. also posted strong results only to see their shares fall.
In Hong Kong, Alibaba Group Holding Ltd. fell after reporting higher revenue but plunging profit, reflecting the rising cost of AI projects and computing infrastructure. Tencent Holdings Ltd. weakened as the company more than doubled its AI spending. Both show investors are growing wary of the mounting cost of the AI buildout rather than cheering the ambition behind it.
Outside of tech, the earnings picture is divided. Resources, finance and pharmaceuticals were among the major sectors to report improved profitability, according to China Merchants Securities. Higher commodity prices lifted profits at non-ferrous metals, coal, oil and chemical companies, while biotech and innovative drugmakers boosted healthcare. Financials benefited from investment gains and strong trading activity.
Companies exposed to China’s domestic consumer told a different story. Weak demand weighed on consumer services, while margins deteriorated across agriculture, real estate, food and beverage, construction materials and autos.
The divide was also evident among some of China’s best-known companies. Developer China Vanke’s first-half losses widened, liquor maker Kweichow Moutai Co.’s net profit declined amid softer demand, and pig farmer Muyuan Foods Group slipped into a loss.
Other headwinds weighed on earnings. A stronger yuan pushed exchange losses at non-financial A-share companies to 107 billion yuan ($16 billion) in the first half, or 5.5% of net profit — the highest share in nearly a decade, according to CICC.
Tougher enforcement also raised tax burdens. At least 95 listed companies have disclosed overdue payments this year, exceeding the 66 in all of 2025 and putting 2026 on track for a record, according to Bloomberg calculations based on exchange filings.
Liquidity Drain
Adding to pressure on tech shares is a liquidity squeeze. New listings are drawing capital from stocks that have already rallied, as investors chase bigger returns in those offerings. A growing pipeline of tech offerings, including Yangtze Memory Technologies Co., may intensify the competition for capital.
“With AI trade showing signs of fatigue amid a lack of fresh catalysts, some funds have been diverted to new listings on expectations of outsized IPO returns,” said Shen Meng, director at investment bank Chanson & Co. Earnings beats at existing players may trigger profit-taking rather than drive further multiple expansion, he added.
Still, sentiment isn’t overwhelmingly bearish. Forward earnings estimates for the CSI 300 Index and MSCI China Index remain near multi-year highs, while further policy support from Beijing and a meeting between Chinese leader Xi Jinping and President Donald Trump could provide fresh catalysts.
Industrial Securities sees scope for the earnings recovery to broaden, with exports and technology manufacturing offsetting some weakness in property and consumption. That could provide a basis for further stock gains.
“We expect this dynamic, in which external demand supports domestic demand and technology-driven manufacturing lifts property and consumption, to broaden across the economy and reach a wider range of sectors,” analysts including Zhang Qiyao wrote in a report.
