China just posted its best earnings growth in years, yet the rally didn't show up where it counts. According to China International Capital Corp, earnings advanced 25.7% over the year in the April-June quarter, the fastest pace in nearly five years. Despite that, the CSI 300 has slid roughly 9% this quarter and the STAR 50 is off 29%.
Part of the problem is the starting point. Into June, the STAR 50 had already leapt 76% and the broader CSI 300 was up 12% for that quarter, which set a tough bar for results to clear. Layer on a soft backdrop - tepid domestic demand, a drawn out property slump, and low odds of a big policy push from Beijing - and earnings beats are not translating into broad market momentum.
The outperformance is clustered. CICC's take points to AI-adjacent names as key drivers, and UBS backs that up: bottom lines on ChiNext climbed 42% and on the STAR board 370%, vastly ahead of the main board that spans more industries. That concentration helps explain why headline growth is not lifting the bigger indexes.
It is also showing up name by name. Memory maker CXMT Corp. delivered revenue above analyst forecasts, but the stock wobbled. Hygon Information Technology, Cambricon Technologies, and Eoptolink Technology all posted solid numbers only to watch their shares drop. In Hong Kong, Alibaba fell after reporting higher revenue but a steep drop in profit, a consequence of mounting expenses for AI projects and computing infrastructure.
Tencent shares weakened after boosting AI expenditures to over twice previous levels. As Union Bancaire Privée's Vey-Sern Ling put it, "Strong numbers no longer work for tech," adding that investors are worried about the longevity of earnings given uncertain AI payoffs, unclear returns and higher financing costs.
Elsewhere, winners and losers split along familiar lines. China Merchants Securities highlighted better profitability in resources, finance and pharmaceuticals. Higher commodity prices boosted non ferrous metals, coal, oil and chemical producers, while biotech and innovative drugmakers lifted healthcare. Financial firms benefited from investment gains and robust trading activity.
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Consumer-facing parts of the economy told a different story. Demand weakness weighed on consumer services, and margins narrowed across autos, construction materials, food and beverage, real estate, and agriculture. Among marquee names, China Vanke's first half loss widened, Kweichow Moutai's net profit fell on softer demand, and Muyuan Foods Group swung to a loss.
Currency and taxes added to the drag. A stronger yuan saddled non financial A share companies with 107 billion yuan in exchange losses in the first half, equal to $16 billion. CICC says that amounted to 5.5% of net profit - the largest proportion in almost a decade.
Tighter enforcement pushed up tax burdens too. At least 95 listed firms have revealed overdue payments so far this year, already exceeding the 66 recorded for all of 2025 and setting 2026 on track for a record, based on Bloomberg's tally from exchange filings.
Liquidity is another pinch point for tech. Fresh listings are soaking up cash from stocks that have already run, and a swelling lineup of offerings, including Yangtze Memory Technologies, could intensify the scramble 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 Chanson & Co. He added that beats from existing players may spark profit taking rather than expand multiples.
It is not all gloom. Projected earnings for the CSI 300 and MSCI China remain close to multi-year peaks, and more help from Beijing or a meeting between Xi Jinping and President Donald Trump could shake things loose. Industrial Securities sees room for the recovery to spread, with exports and tech manufacturing offsetting some of the property and consumption weakness. "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.
Bottom line for your wallet: profit growth is real, but it is concentrated in AI and resources while the broader economy is still slogging through weak demand, currency and tax drags, rising AI bills and a tug of war for liquidity from new IPOs.
