Cheap Chinese Goods Are Becoming a Costly Problem. Exhibit A: Hong Kong.

Prices are falling in mainland China. That’s a boon for people living in Hong Kong, but a big problem for the city’s businesses.

Consumer prices in China fell 0.8% in January compared with a year earlier, the country’s biggest deflation reading in more than a decade. That is a sign of the tepid state of the world’s second-largest economy, where a sputtering recovery has knocked confidence and encouraged Beijing to censor some economic research .

Hong Kong residents are increasingly hopping across the border to the city of Shenzhen, where they load up on frozen food and cheap furniture at big-box stores such as Costco and Sam’s Club. Hong Kong business owners, unable to compete with their Chinese counterparts on price, are feeling the squeeze.

“Walking on the streets these days, you’ll feel that Hong Kong retailers are in big trouble,” said the city’s former financial secretary, John Tsang, in a recent social-media post.

The pain being felt by businesses in Hong Kong offers a partial answer to a question that has been debated by economists for much of the past year: How will deflation in China affect the rest of the world?

Chinese export prices have dropped steadily since late 2022 and were 8.4% lower in December than they were a year earlier, according to customs data. Economists think that’s probably a good thing for Europe and the U.S., where central banks have been forced to embark on an aggressive series of interest-rate increases to keep rising prices in check. But the impact on smaller countries could be more troublesome.

China is the biggest trading partner for many countries across the world, and is particularly influential for countries in Asia. The risk for them is that Chinese companies dump their goods overseas in response to weak demand at home. They can also undercut manufacturers in countries such as Vietnam and Malaysia, which have slowly been muscling in on China’s status as the world’s factory.

“This Hong Kong story is applicable to countries that are near the neighbourhood of China because the supply chain is much smaller,” said William Lee , chief economist at the Milken Institute, an economic think tank. The shorter supply chain for China’s trade with its neighbours means changes in price pass through more directly, rather than being swallowed up by the various companies that get involved in shipping goods over longer distances.

China’s neighbours in East Asia don’t have the option to impose protectionist policies against it, analysts at Citigroup wrote in a January note. China is simply too big a force in global trade for them to risk its ire.

But if it is hard for China’s neighbours to push back against falling prices, it is even tougher for Hong Kong—which is run by a pro-Beijing government that wants closer integration with the superpower next door.

Hong Kong residents are partly benefiting from the strength of the U.S. dollar. The Hong Kong dollar is pegged to the U.S. dollar, and the city’s de facto central bank has copied the Federal Reserve’s series of interest-rate increases over the past two years. China’s central bank has gone in the opposite direction, cutting rates in an attempt to boost the moribund economy.

Since the end of 2021, the Chinese yuan has lost more than 11% of its value against the Hong Kong dollar.

Counting the cost

Hong Kong’s economy grew 3.2% last year, clawing back some lost ground after a 3.7% contraction in 2022. But the numbers mask a host of difficult problems, including an exit of foreign businesses , a prolonged slump in the real-estate sector and the lowest fertility rate in the world .

The apparent embrace of what mainland China had to offer would have appeared unthinkable five years ago, when the city was swept up in antigovernment protests. Back then, shoppers and diners looked up colour-coded maps to help them identify businesses that shared their political stance to patronise—and avoided those perceived as having links to mainland China.

But years spent cooped up in Hong Kong during the pandemic and penny-pinching by anxious residents have helped boost Shenzhen’s appeal.

“We’re seeing a readjustment of our way of life that suggests economic interdependency between Hong Kong and Shenzhen,” said Edmund Cheng, a political sociology professor at the City University of Hong Kong.

Last year, Hong Kong residents made more than 50 million trips up north following the lifting of all pandemic-related travel restrictions in February, according to Hong Kong Immigration Department data. That’s still below pre pandemic levels, but the Hong Kong residents’ spending power helped boost retail sales in Shenzhen, which rose by 7.8% in 2023, recording one of the biggest jumps at any mainland city last year.

In a survey by a business lobby last year, just 37% of Hong Kong businesses said they expected revenue to grow in 2024. Less than a third thought they were on track to beat pre pandemic levels.

Korsy Lee, 39 years old, is one of many Hong Kong residents who make a regular pilgrimage to Shenzhen—and earns a profit from it. He began shuttling goods back from Shenzhen last August as a side hustle, and now goes there four times a week, loading up his Toyota minivan with frozen hamburgers, fish maw soup, Panasonic dishwashing machines and even toilet-paper rolls. He takes orders from customers and charges a flat fee.

“Eighty percent of my customers are housewives who want to make every penny count,” he said.

Reporting season has once again reminded investors that a strong profit does not guarantee a rising share price, and a large loss does not always trigger a sell-off. What matters most is how each result compares with expectations and, increasingly, what management says about the year ahead. During the August 2026 season, companies offering credible turnarounds or unexpectedly strong guidance were rewarded handsomely, while those flagging weaker margins, slowing demand or greater uncertainty were punished.

The following ranking draws on Morningstar’s review of 164 ASX-listed companies and measures each company’s share-price movement on the day it reported. This captures the market’s immediate response to the earnings announcement, before subsequent economic developments, dividends and company-specific news cloud the picture. Here are the five biggest winners, and the five hardest-hit losers, of the season so far.

The five winners

1. Bapcor (ASX:BAP): +41.0%

Bapcor delivered reporting season’s largest relief rally after presenting early evidence that its troubled automotive-parts business was stabilising. Although underlying revenue fell 1.8% to $1.92 billion and underlying NPAT collapsed 85% to $10.8 million, underlying EBITDA of $152.5 million exceeded guidance.

More importantly, working-capital initiatives released $68.5 million in the second half, lifting cash conversion to 109.4% and reducing net debt by 63% to $135 million. The statutory loss was $431.6 million, largely because of non-cash impairments. Investors focused on improving operational momentum, stronger liquidity and management’s expectation of modest FY27 revenue growth.

2. Zip Co (ASX:ZIP): +18.2%

Zip comfortably surpassed its FY26 targets, sending the buy-now-pay-later provider’s shares sharply higher. Transaction volume rose 23% to $16.7 billion, while cash earnings before tax, depreciation and amortisation jumped 58% to a record $268.9 million. Statutory profit climbed 46% to $116.4 million, and the cash operating margin expanded by 4.2 percentage points to 20%.

The strongest signal was guidance for FY27 cash earnings of $340 million—around 26% growth and above analysts’ forecasts. US transaction volume increased 42.5% and now represents three-quarters of group volume, offsetting weaker customer activity in Australia.

3. CSL (ASX:CSL): +17.3%

CSL’s result was hardly spectacular in isolation, but it cleared a market bar that had fallen dramatically following earlier downgrades and restructuring announcements. Underlying NPATA was US$3.1 billion, down 2% in constant-currency terms, while operating cash flow reached US$3.51 billion.

CSL maintained its full-year dividend at US$2.92 per share and completed a A$1 billion buyback. The real catalyst was FY27 guidance for approximately 5% underlying profit growth, compared with market expectations closer to 2%. After an extended period of earnings disappointments, investors interpreted the outlook as evidence that CSL’s core plasma business was approaching a sustainable recovery.

4. Judo Capital (ASX:JDO): +16.9%

Judo Capital demonstrated strong operating leverage as its specialist business-lending franchise expanded. Full-year profit before tax rose 34% to $168.1 million, while pre-provision profit increased 42%. Gross loans and advances grew 18% to $14.7 billion, reaching the top of the bank’s guidance range and comfortably exceeding broader system growth.

Deposits increased 24% to $12.2 billion, return on equity improved by 1.1 percentage points to 6.4%, and earnings per share rose 29% to 9.9 cents. Reaffirmation of the FY27 outlook gave investors confidence that loan growth could continue without sacrificing margins or credit quality.

5. Super Retail Group (ASX:SUL): +15.8%

The owner of Supercheap Auto, rebel, BCF and Macpac reported record sales of $4.2 billion, up 3.2%, despite cautious discretionary spending. Profitability went backwards: normalised profit before tax fell 7% to $306 million and normalised NPAT declined 2.8% to $226 million as transformation spending weighed on margins. Nevertheless, the result exceeded subdued expectations, online sales grew 5.3% and membership across the group’s loyalty programs reached 13.1 million. Investors were also encouraged by positive early FY27 trading, stable gross margins and continued market-share gains. A fully franked 33-cent final dividend added to the appeal.

The five losers

1. Hansen Technologies (ASX:HSN): –21.2%

Hansen’s historic result met expectations, but investors recoiled from its outlook. The utility and communications software provider achieved an underlying EBITDA margin of 31%, exceeding its 30% target, while generating strong cash flow. However, management designated FY27 an “investment and transition year”, signalling a roughly five-percentage-point margin contraction as spending on products, sales capabilities and organisational changes increased.

Revenue had already been broadly flat, leaving investors concerned that the investment program would depress earnings before new growth appeared. Leadership changes, including the chief executive’s departure, added uncertainty. Management expects revenue growth and margins above 30% to return in FY28, but the market was unwilling to wait.

2. Life360 (ASX:360): –19.4%

Life360’s headline growth was impressive: quarterly revenue rose 38% to US$159 million, subscription revenue increased 31%, and adjusted EBITDA climbed 53% to US$31.1 million. Monthly active users reached 102.4 million and paying circles grew 27% to 3.2 million. The sell-off reflected expectations rather than a collapsing business.

Net income fell 18%, the net margin contracted from 6% to 3%, hardware shipments dropped 18%, and full-year EBITDA guidance was merely maintained. After a strong valuation run, investors wanted a larger upgrade and clearer evidence that heavy investment in advertising, international expansion and artificial intelligence would generate additional earnings.

3. PEXA Group (ASX:PXA): –17.0%

PEXA reported a 7% increase in continuing-operations revenue and 12% EBITDA growth to $152 million, accompanied by a two-percentage-point margin expansion. Free cash flow increased 39%, suggesting the core Australian electronic-conveyancing platform remained highly profitable. Investors instead concentrated on management’s warning that property-transfer volumes could decline, alongside regulatory uncertainty surrounding the fees PEXA can charge.

The company is also continuing to invest heavily in its loss-making international expansion. Morningstar considered the market reaction excessive, arguing that structural transfer-volume assumptions had not materially changed, but the combination of softer near-term activity and regulatory risk overwhelmed the respectable headline numbers.

4. SEEK (ASX:SEK): –14.3%

SEEK produced solid FY26 figures, including 10% revenue growth to $1.20 billion, a 15% rise in EBITDA and 28% growth in adjusted earnings per share. It also lifted its fully franked annual dividend by 13% to a record 52 cents. Those achievements were overshadowed by falling paid job-ad volumes and cautious FY27 assumptions.

The statutory accounts included a $201 million loss from the SEEK Growth Fund and $377 million of significant items, making the headline result considerably less attractive. Investors were particularly concerned that economic weakness could limit volumes while the company continued investing in platform integration and artificial-intelligence products.

5. JB Hi-Fi (ASX:JBH): –12.3%

JB Hi-Fi’s full-year result was broadly respectable, with group sales rising 5% to $11.1 billion and underlying earnings per share increasing 6% to $4.48. The damage came from its current-trading update. Australian sales were almost flat during the June quarter and deteriorated further in July, while earnings in the core Australian electronics business fell 3.6%.

Housing-related categories were particularly weak as higher living costs and interest rates constrained household budgets. With JB Hi-Fi entering the season on a demanding valuation, an in-line historic result was not sufficient: the loss of sales momentum prompted investors to rapidly reduce their expectations for FY27.

Overall, the season showed that share prices react less to whether profits rose or fell than to the gap between results and expectations. Bapcor was rewarded for being less troubled than feared, while several fundamentally profitable companies were punished because their outlooks failed to justify elevated valuations.