China’s industrial sector is grappling with significant challenges, as evidenced by a 10% year-on-year drop in profits for October 2024. This marks the third consecutive month of declines, signaling ongoing struggles in the financial health of factories, mines, and utilities. Despite Beijing’s efforts to stimulate the economy through policy measures, the impact remains uneven, with structural challenges in domestic consumption and real estate continuing to weigh heavily on overall economic growth.

This analysis explores the implications of these trends, focusing on the limitations of China’s current stimulus efforts, the sector-specific responses to economic policies, and the broader outlook for the world’s second-largest economy.

A Sector in Decline: Causes and Trends

The 10% profit decline in October follows a 27.1% drop in September, the steepest since the pandemic-induced slump of early 2020. For the first ten months of 2024, industrial profits fell 4.3% compared to the same period last year, reflecting persistent deflationary pressures and weakening demand. State-owned enterprises suffered an 8.2% decline, while private enterprises saw a 1.3% drop in profits. Foreign-funded firms managed to eke out a 0.9% increase, likely due to external demand for high-tech goods.

The fall in profitability is tied to several factors:

• Global Economic Weakness: Sluggish external demand from key trading partners like the United States and Europe has dampened export growth.
• Domestic Consumption Challenges: China’s consumer price index (CPI) rose by only 0.3% year-on-year in October, while the producer price index (PPI) fell by 2.9%. These indicators suggest deflationary pressures are constraining both consumer and industrial activity.
• Real Estate Downturn: Fixed-asset investment in real estate fell by 10.3% through October, exacerbating the economic slowdown by stalling construction and related industries.

Stimulus Measures and Limited Impact

Since late September, Chinese authorities have rolled out various stimulus measures to stabilize growth and meet the government’s 5% annual GDP target. These measures include:

• Sector-Specific Support: Policies targeting equipment and high-tech manufacturing appear to have yielded some results. According to the National Bureau of Statistics (NBS), these industries saw improved profitability compared to the prior month.
• Fiscal and Monetary Policy Adjustments: Tax cuts, infrastructure spending, and interest rate reductions aim to bolster economic activity.

However, the effects of these policies remain constrained. The industrial sector’s challenges are rooted in structural issues, such as overcapacity in traditional manufacturing and a lack of consumer confidence, which cannot be quickly resolved through stimulus alone.

Mixed Signals in Economic Data

China’s latest economic data presents a complex picture:

• Positive Developments: October retail sales rose 4.8% year-on-year, exceeding expectations, and the unemployment rate dropped slightly to 5%. These gains suggest that stimulus measures have boosted consumer sentiment in certain areas.
• Ongoing Weakness: Industrial production grew slower than anticipated, while real estate investment showed an accelerated decline. The modest rise in the CPI and the continued drop in the PPI further indicate that demand remains insufficient to drive robust economic recovery.

Eugene Hsiao, head of China equity strategy at Macquarie Capital, notes that the smaller decline in industrial profits reflects stabilization at a low base. This coincides with one-off demand, such as exporters rushing to fulfill orders before anticipated U.S. tariffs take effect. Still, Hsiao emphasizes that meaningful recovery in corporate earnings will likely require more aggressive fiscal support from Beijing in the coming year.

Structural Challenges and Global Implications

China’s industrial struggles underscore broader structural challenges within its economy:

• Dependence on Real Estate: The sector’s prolonged downturn is stifling investment and consumption, with ripple effects across industries like steel, cement, and furniture manufacturing.
• Deflationary Risks: Persistently low price levels, as indicated by the PPI, threaten to erode business revenues and investor confidence, potentially leading to a deflationary spiral.
• Export Dependence: Weak external demand and geopolitical tensions, particularly with the United States, continue to weigh on export-oriented industries.

The global economy is not immune to these challenges. China’s industrial sector is deeply intertwined with global supply chains, and its slowdown could dampen global growth, particularly in Asia-Pacific economies reliant on Chinese trade and investment.

Policy and Market Outlook

Looking ahead, China faces a delicate balancing act in managing its economic recovery. Additional stimulus measures are expected, but their design and implementation will be critical:

1. Broad-Based vs. Targeted Support: Policymakers must decide whether to prioritize sector-specific interventions (e.g., high-tech manufacturing) or adopt broader measures to boost domestic demand.
2. Monetary Policy Adjustments: Further interest rate cuts and liquidity injections could provide short-term relief but risk exacerbating financial imbalances if overused.
3. Structural Reforms: Long-term recovery will depend on addressing underlying issues, such as overcapacity, real estate reliance, and insufficient domestic consumption.

Market analysts remain cautiously optimistic about incremental improvements. The official manufacturing purchasing managers’ index (PMI) for November is expected to show slight expansion, reflecting stabilization in industrial activity. However, sustained growth will require more decisive action and structural adjustments.

China’s industrial sector is navigating a challenging landscape marked by weak profits, deflationary pressures, and structural inefficiencies. While Beijing’s stimulus measures have provided some relief, their impact has been limited, highlighting the need for deeper reforms to address underlying vulnerabilities.

As the world’s second-largest economy, China’s performance carries significant implications for global growth and trade. Policymakers must strike a delicate balance between short-term interventions and long-term solutions to ensure sustainable recovery. For now, the path to stabilization remains fraught with uncertainty, with the outcome closely watched by markets and policymakers worldwide.

(Adapted from CNBC.com)