China's industrial profit growth falls sharply in October
China's industrial companies experienced a significant decline in profits in October. The companies recorded a third consecutive month of profit growth last month but at a slower rate of 2.7% year-on-year, compared to September's 11.9% and August's 17.2%. Data from the country's National Bureau of Statistics (NBS) shows that profits decreased by 7.8% in the first 10 months of 2023 compared to the previous year, a slight improvement from the 9% decline in the first nine months.
Factors affecting profit growth
The Chinese economy has faced challenges in achieving a strong post-COVID recovery due to issues such as a struggling housing market, local government debt risks, slow global growth, and geopolitical tensions. The policies meant to help industries haven't done much, so now there's more pressure on authorities to implement further stimulus measures.
'Worst times are over for China'
Xu Tianchen, a senior economist at the Economist Intelligence Unit (EIU), said, "Three consecutive months of positive profit growth suggest that the worst times, when profitability was squeezed by high input costs, overcapacity and soft demand, are over." However, he also mentioned that "the volatility of profits is a sign enterprises remain highly sensitive to input costs," and pointed to rising energy prices as a factor in the slowdown.
Mixed data and divergence in profits
In October, new export and import orders continued to decline for the eighth month in a row, as per the official PMI. However, industrial output rose by 4.6% compared to last year, led by robust auto and restaurant sales. Goldman Sachs observed that "the divergence in profits across various sectors and firms remained significant." Furniture companies' profits dropped 11.8% year-on-year in the first 10 months of 2023, while electronics manufacturers saw profits soar by 20.8% during the same timeframe.
Calls for more policy support and structural reforms
As industrial profit growth in China slows down, pressure is building on authorities to provide more support to manufacturers. The NBS recommended that authorities should "focus on expanding domestic demand and inspiring businesses." On Monday, China's central bank and other authorities called for additional measures to enhance financial support for private companies, including allowing increased issuance of loans, bonds, and shares.
