The Chinese economy is supposed to be skipping along nicely down the road to recovery. Yet you wouldn’t know it from earnings forecasts – few upgrades have been made since the third quarter of last year. And over the weekend ZTE warned that it expected a full-year loss of up to Rmb2.9bn for 2012. Back in October, China’s second-largest telecoms equipment maker, which depends on the home market for almost half its sales, said it hoped to break even. It comes after another profit warning from TCL Communication, a mobile phone maker, this month. Comba, a larger peer, is expected to follow suit.

True, there is fierce competition in China among lower-end mobile phone makers. ZTEadded poor domestic sales in this segment to the laundry list of reasons for its poor performance it gave late last year. But there are other risks to earnings across all sectors, which are tempering expectations. Bank of America notes that the ratio of capital expenditure to sales among non-financial companies listed in Shanghai fell to its lowest level since early 2010 in the third quarter last year. It is delayed capex by telecom operators on 4G that has also been hurting ZTE.

The problem is that net margins are still under pressure from rising tax burdens and higher wages. Local governments need to recover funds from falling land sales. And as the labour force shrinks and Beijing focuses on income equality, the cost of labour has risen to an average 6 per cent of sales from 5 per cent a year ago. In addition, leverage remains high, with net debt to equity levels at 48 per cent across companies listed in Shanghai. That puts companies at risk from rising inflation as a responding hike in interest rates will add to their woes. Chinese companies are some way off regaining the spring in their step.