Daily Management Review

Growth In China's Industrial Earnings Slows, But Requests For Stimulus Remain


October saw profits at China's industrial companies continue to rise for a third month, albeit more slowly. This indicates Beijing may need to provide additional policy support to maintain growth in the second-largest economy in the world.
After an 11.9% gain in September and a 17.2% gain in August, the 2.7% year-over-year increase in profit growth narrows back to single digits, placing pressure on authorities to provide manufacturers with additional support as lacklustre global demand continues to plague policymakers leading up to 2024.
Profits fell 7.8% in the first ten months of 2023 compared to the same period last year, which was less than the 9% decrease in the first nine months, according to data released on Monday by the National Bureau of Statistics (NBS).
Due to challenges posed by the property market, dangers associated with local government debt, weak global development, and geopolitical concerns, China's economy has found it difficult to recover from the COVID-19 pandemic.
The limited impact of a flurry of policy support initiatives has increased pressure on authorities to implement more stimulus.
"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," said Xu Tianchen, senior economist at the Economist Intelligence Unit (EIU).
"However, the volatility of profits is a sign enterprises remain highly sensitive to input costs," he added. "The sharp slowdown of year-on-year profit growth was partly driven by a rebound in energy prices."
In a reference to the trade difficulties faced by manufacturers, the NBS stated that authorities should "focus on expanding domestic demand and inspiring businesses."
October data has been inconsistent.
October saw a decline in new export and import orders for the eighth consecutive month, per the official purchasing managers' index (PMI). But October saw a 4.6% increase in industrial output over the same month last year, helped by robust restaurant and car sales.
As stated in a note by Goldman Sachs, "the divergence in profits across various sectors and firms remained significant".
For instance, during the first ten months of 2023, furniture companies' profits decreased 11.8% year over year, whilst those of electronics manufacturers increased by 20.8% during the same time frame.
"Early signs of a comeback in the global electronics cycle will work in Chinese manufacturers' favour," said the EIU's Xu, who warned of downside across the sector and overcapacity across electric vehicles, lithium batteries and solar cells in 2024.
Due to supply shortages and macroeconomic challenges, LONGi Green Energy Technology Co., a significant domestic producer of solar energy, suffered a 44.1% decline in net profit in the third quarter, to 2.5 billion yuan ($346.7 million).
China's central bank and other officials demanded on Monday that additional steps be taken to fortify financial assistance for private businesses, such as permitting a greater volume of loans, bonds, and share issues.
Earlier this month, the governor of the central bank stated that "transforming the economic growth mode is more important than pursuing a high growth rate," implying that when investment-led growth wanes, there is an urgent need for longer-term structural reforms.
Hong Kong's Hang Seng dropped 1.07% following the data, while China's blue-chip CSI300 index dropped 1.21%.
An analysis of the NBS data showed that in the first ten months, state-owned companies reported a 9.9% fall in earnings, foreign companies saw a 10.2% decline, and private-sector companies witnessed a 1.9% decline in profits.
Businesses with yearly revenues from their primary operations of at least 20 million yuan ($2.74 million) are included in the industrial profits data.