Last year's results show market ignoring weak fundamentals Almost 60 per cent of reporting A-share companies posted losses or issued loss warnings last year, even as bullish investors began returning to the laggard market. Of the 563 A-share firms that have released earnings results for last year, 26 per cent posted losses for the first time, 15 per cent reported continued losses, and 18 per cent sounded loss warnings, according to Wind Research. 'These numbers will catch many people's attention when the market is still so hot,' says Eddie Wong, ABN Amro's chief Asia strategist. The A-share market has risen almost 30 per cent since hitting eight-year lows in the middle of last year, but analysts say it is being driven by expectations of further capital inflows rather than fundamentals. 'The current exuberance is very much liquidity-driven and is based on expectations of fund inflows,' said Bruce Richardson, head of research at Evolution Securities. Despite weaker fundamentals, A-share investors are now optimistic after 10 years of consistent underperformance. Their newfound faith arises partly from government reform of the state shareholding system, which appears to be going smoothly, and hopes of new market-boosting initiatives this year, including a resumption of new listings suspended since the middle of last year. Firms making up more than 35 per cent of market capitalisation have had their listing plans approved by minority shareholders. 'There's this really great feeling in the market right now and everybody is waiting for the new listings. It's like people are lining up at the starting line waiting for the gun,' Mr Richardson said. However, deteriorating A-share balance sheets reflect the overall economy, research from China International Capital Corp shows. If resource-related companies in industries such as energy are excluded, profit growth in China fell sharply to about 8 per cent last year from 40 per cent growth in 2004. Profit margins fell from 5.1 per cent in 2004 to 4.3 per cent last year if resource firms are excluded. Including these firms, overall margins eased from 6.1 per cent in 2004 to 5.8 per cent last year. Falling profits resulted from a margin squeeze due to rampant overcapacity, rise in production costs, including raw materials and wages, and a general slowdown. 'Most firms have no pricing power and, in the face of rising production costs, have to cut prices or be kicked out of the market,' said Ha Jiming, the chief economist at China International Capital. The margin squeeze would affect more A-share than H-share firms as the quality is generally lower and because of the way the indices are devised. 'The H-share index has many more companies related to oil, insurance and banking, which will be affected by the margin squeeze, but not until later,' Mr Wong said.