China’s industrial sector is experiencing significant turbulence, highlighted by the recent announcement from the National Bureau of Statistics (NBS) indicating a 10 percent decline in industrial profits for October compared to the same month last year. This figure marks the continuation of troubling trends, as earlier reports revealed even steeper declines of 27.1 percent year-on-year profits for September, which was the most drastic plunge since the COVID-19 pandemic reshaped global economics.
These numbers raise alarms about the health of one of the world's largest economies, which is grappling with persistent deflationary pressures and weak demand. The current economic climate is causing serious concern as the Chinese government aims for modest growth targets, including maintaining at least 5 percent growth in Gross Domestic Product (GDP) for the year 2024.
Economists and analysts closely monitor China’s industrial profits as they serve as key indicators of the economic vitality of manufacturing hubs, mines, and utilities across the country. The recent downturn is particularly troubling as this reduction appears to be part of a larger pattern, with industrial profits having decreased for three consecutive months. Profit declines of this magnitude call to question the effectiveness of Beijing's economic stimulus packages, aimed at counteracting sluggish demand.
According to data provided by the NBS, for the first ten months of 2024, profits have fallen by 4.3 percent when set against corresponding figures from the previous year. The preceding month, September, had recorded a decline of 3.5 percent. Both statistics suggest worsening conditions as firms across various sectors tighten their belts amid rising costs and decreasing sales.
The NBS attributes the somewhat smaller decline for October to the recent implementation of stimulus measures, which seem to have had marginal positive impacts on certain sectors, particularly high-tech manufacturing and equipment sectors. NBS statistician Yu Weining noted, “Most industries showed improved profitability from the previous month,” reflecting perhaps the early effects of governmental efforts to stabilize the economy.
Eugene Hsiao, head of China equity strategy at Macquarie Capital, echoes this sentiment, stating, “The deceleration in the decline of industrial profits reflects a gradual stabilizing of Chinese economic conditions, albeit at a low base.” He cautions, though, of the reality faced by local exporters, who have ramped up their shipments to the U.S. to avoid potential higher tariffs under the increasing trade tensions.
The disparity between the performance of state-owned and private enterprises is noteworthy as well. While state-owned firms reported profits dropping 8.2 percent from January to October, private firms showed marginal resilience with only a 1.3 percent decline. Interestingly, foreign industrial firms, including those with Hong Kong, Macao, and Taiwan investments, have managed to report a slight profit increase of 0.9 percent during the same timeframe.
Added pressures are mounting as the Chinese consumer price index recorded only 0.3 percent growth from last year, marking it the slowest rise since June. On the opposite spectrum, the producer price index has dropped by 2.9 percent year-on-year, showing growing deflationary concerns. While some sectors display resilience, particularly with retail sales reporting stronger-than-expected growth of 4.8 percent for October, the overall picture remains concerning.
China is at a crossroads, balancing immediate needs for economic growth with long-term stability and reform. Authorities have ramped up initiatives and pronounced numerous stimulus announcements over the past few months, but analysts suggest these efforts will need time to yield significant results. Expectations for fiscal support are high, with analysts hopeful for increased meaningful impacts on corporate earnings by next year.
The upcoming release of the official manufacturing purchasing managers' index (PMI) for November is anticipated with significant interest. Predictions indicate it may show slight improvement, moving from 50.1 to 50.3, which would imply moderate expansion; anything above 50 reflects increasing economic activity.
Yet, China's ability to navigate these economic challenges remains subject to external pressures, such as potential trade restrictions and tariffs from the United States. With the political climate changing and economic forecasts being revised, industry stakeholders are left watching how these developments will influence China's growth narrative moving forward.
While October paints a concerning picture for the world's second-largest economy, the push for greater economic stability and stronger profits hinges on both internal strategies and responses to global economic dynamics.
