Industrial Profit Plunge Reflects China’s Economic Struggles
China’s industrial sector recorded its sharpest profit decline since the onset of the pandemic, with a 27.1% year-over-year drop in September, according to data from the National Bureau of Statistics. This steep fall, surpassing August’s 17.8% decrease, highlights the mounting challenges facing China’s economy, which has been grappling with sluggish growth, weak demand, and a prolonged property crisis. Notably, September’s profit decline was the sharpest since March 2020, when profits plunged by 34.9%. For much of 2022, economic data was inconsistent due to strict COVID-19 restrictions, particularly in regions like Shanghai, where lockdowns severely limited industrial operations.
The drop in profitability underscores the challenges China’s industrial firms face amid low domestic demand and declining producer prices. NBS statistician Yu Weining highlighted that “insufficient demand and a sharp decline in producer prices” are significantly impacting industrial profitability, and early data reflects a concerning trend. In September, the producer price index declined by 2.8% year-over-year, a sharper fall than August’s 1.8% dip, indicating a deepening deflationary trend within the industrial sector.
Government Plans Stimulus Amid Weak Economic Data
In response to the weakening economy, Chinese authorities have intensified their efforts to stimulate growth. The National People’s Congress (NPC) is expected to reveal further fiscal support measures following its upcoming parliamentary meeting next month. This aligns with recent commentary from Goldman Sachs’ chief China economist, Hui Shan, who noted that these latest profit figures underscore “the need for more forceful policy responses amid weak domestic demand and deflationary pressures.” The NPC’s actions are anticipated as the country’s leadership faces mounting pressure to revitalize China’s growth trajectory, which has been hindered by sluggish consumer activity and stalled investment.
These concerns are echoed by analysts observing sector-specific stress within the industrial economy. Gary Ng, a senior economist at Natixis, emphasized that “the weakness of industrial profits indicates China’s greater need for demand-side policies.” He highlighted that while some sectors continue to perform better than others, the strain on upstream materials and automotive industries is particularly intense. As the country enters the final quarter of the year, there is a pressing need for targeted policies that can reignite demand and stabilize prices to ensure a more balanced economic recovery.
China’s Growth Forecasts Remain Pressured as Economic Indicators Falter
China’s economic growth, although positive, is showing signs of deceleration, raising concerns about the nation’s ability to meet its growth target. In the third quarter, the economy expanded by 4.6%, marking the slowest quarterly growth rate since early 2023. This brings the overall growth rate for the first three quarters of the year to 4.8%, just below the government’s target of approximately 5% for 2024. As part of its regular economic tracking, China is set to release its official manufacturing Purchasing Managers’ Index (PMI) for October, with analysts forecasting a marginal improvement to 50.1 from September’s contraction-level reading of 49.8. This index, which has seen contraction for five consecutive months, is critical as a reading above 50 would indicate a return to expansion in manufacturing activity.
The PMI and industrial profit figures together paint a mixed picture of China’s economic stability. With industrial profitability waning and core growth indicators underperforming, there is renewed urgency for decisive government intervention to stimulate domestic demand and address the economic slowdown. The upcoming announcements from the NPC may provide a clearer path forward for China’s industrial sector and broader economy, as policymakers strive to navigate the challenges and meet the growth targets set for the year.
