China Oct industrial profits narrow decline, but headwinds loom

BEIJING – China’s industrial profits fell again in October, but less sharply than the previous month as deflation pressures dragged while demand remained soft in the crisis-hit US$19 trillion (S$25.6 trillion) economy.

Fresh headwinds from additional US tariffs could also threaten China’s industrial sector in 2025, reducing export earnings.

The sprawling sector, which includes mining, processing and manufacturing companies, has struggled to stay profitable in the face of feeble domestic demand hit by a years-long property crisis, unemployment and rising trade tensions.

Policymakers have vowed to meet the government’s gross domestic product growth target of around 5 per cent in 2024 even as US President-elect Donald Trump pledges to slap more tariffs on China-made goods.

Industrial profits in October fell 10 per cent year on year, better than a 27.1 per cent slump in September, though earnings slid 4.3 per cent in the first 10 months versus a 3.5 per cent decline in January-September, National Bureau of Statistics (NBS) data showed on Nov 27.

Profits in most industries improved compared with the previous month, with new drivers such as equipment and high-tech manufacturing playing a strong supporting role, NBS statistician Yu Weining said in an accompanying statement. But some private sector economists attributed the October improvement partly to the effect of a low base from a year earlier. Industrial profits in October 2023 grew 2.7 per cent, easing from double-digit gains in August and September 2023.

“For the October monthly data alone, the year-on-year level has a lot of noise due to base effects, and the difference can largely be attributed to this,” said ING chief economist for Greater China Lynn Song.

“Overall, profits are still under some pressure this year as the 4.3 per cent year-on-year decline year-to-date shows, though there is hope that as more policy easing starts to come through, the operating environment will become more favourable next year.”

Deflationary pressures

Separate economic indicators earlier this month pointed to broadly soft demand, with consumer prices at their weakest in four months, while industrial output continued to trend downward and new home prices fell at their fastest pace in nine years.

Earlier November data showed producer prices fell 2.9 per cent in October, deeper than the 2.8 per cent drop in the previous month and worse than an expected 2.5 per cent decline. It marked the biggest drop in 11 months.

Factory-gate deflation deepened in the petroleum and natural gas extraction, oil and coal processing, chemical products manufacturing and auto manufacturing sectors.

“Raw materials manufacturing and consumer goods manufacturing profits continue to face pressure to fall further,” warned GDDCE Research Institution senior analyst Ma Hong.

“Looking ahead to November, in view of the PPI (Producer Price Index) which remains in the negative range, the price of raw materials represented by coal is under pressure, and industrial enterprise profit margins are still in a slow downward trend.”

Industrial profit numbers cover firms with annual revenues of at least 20 million yuan (S$3.7 million) from their main operations.

China’s US$1.4 trillion local debt package unveiled earlier in November fell short of expectations for strong stimulus to boost consumption, meaning investors are still waiting for a more direct fiscal bazooka. China’s export earnings will also be squeezed by US tariffs, hammering manufacturers. Trump could impose 40 per cent tariffs on imports from China, a Reuters poll of economists showed.

If tariffs are gradually increased to 40 per cent and not all at once, expedited shipments ahead of new tariffs could help offset the impact of subsequently higher levies, resulting in a 2025 export decline of 1.7 per cent, according to Minsheng.

If only an additional 10 per cent tariffs are imposed, China’s 2025 export growth could come in at 0.2 per cent, the Chinese securities firm said. REUTERS