In November, China’s industrial profits experienced a decrease of 7.3% compared to the same month in the previous year, according to the National Bureau of Statistics (NBS). While this decline is less severe than the 10% drop recorded in October, it nonetheless points to broader economic challenges. As the second-largest global economy grapples with stagnant domestic consumption and volatility from international relations, the expectation is set for one of the most significant annual profit declines in over twenty years.
The numbers reveal a nuanced picture of recovery. Economic indicators such as the producer price index (PPI), which saw a 2.5% year-on-year decrease in November (improved from October’s 2.9%), suggest that the industrial sector may be benefiting from recent government stimulus measures. These measures have been crucial in cushioning the economy against the impacts of various headwinds, particularly given the persistently weak consumer demand.
China’s post-pandemic economic revival has not been as robust as anticipated. The subdued appetite for spending among businesses and households is contributing to sluggish recovery. Compounding the issue is a protracted crisis in the housing market, which has continued to weigh heavily on the broader economy. Analysts, including Zhou Maohua from China Everbright Bank, describe the industrial sector as undergoing an uneven recovery, with specific challenges evident in related industries, particularly real estate.
Despite a slight upward adjustment in the World Bank’s growth forecast for China to 4.9% for 2024, the cumulative effects of a declining profit trend are alarming. For instance, in the first eleven months of the year, industrial profits have declined by 4.7%. When taking into account smaller firms that fall under different reporting methodologies, the profits may see their sharpest downturn since at least the year 2000.
Recent indicators revealed a contradictory economic landscape. The industrial output did see some acceleration in November, showing potential signs of life amidst a backdrop of declining profits. Meanwhile, new home prices have begun to decrease at a less severe rate than seen in recent months, indicating a possible stabilization in the housing market. However, it’s worth noting that these mixed signals do not obscure the overarching realities: demand remains inadequate, and the economic environment is still tenuous.
The Chinese government’s response to these challenges has included commitments made during a crucial policy meeting to raise the fiscal deficit, issue more debt, and relax monetary policies. Plans for direct fiscal measures intended to encourage consumer spending alongside enhanced social security support are part of a broader strategy aimed at bolstering the economy.
The industrial profit data reflects a diverse performance across different sectors. State-owned enterprises recorded an 8.4% reduction in profits over the first eleven months of the year, while foreign firms reported a 0.8% decline. In contrast, privately-owned companies experienced a more modest fall of 1%. This variability not only highlights the ongoing challenges faced by various segments of the economy but also emphasizes the differential impact of external and internal factors on business profitability.
As we look towards the future, the government has announced plans to issue a staggering $411 billion in special treasury bonds next year. This strategy aims to inject capital into the economy, stimulate growth, and potentially mitigate the ongoing challenges posed by low consumer demand.
The struggles facing China’s industrial sector underscore a critical moment in its economic landscape. While there are signs of potential recovery driven by government measures and slight improvements in certain economic indicators, the entrenched issues of weak domestic consumption and external trade risks cannot be overlooked. As we approach the new year, the focus will be on whether these initiatives will result in tangible improvements or if the trends observed thus far continue to dictate a challenging economic environment. The path forward remains uncertain, but proactive policy measures will be essential to navigate these turbulent times.