China’s industrial profits fell at a slower pace in November, signaling tentative signs of stabilization as recent economic stimulus measures begin to take effect. However, analysts predict that the full-year decline will be the steepest in over two decades, reflecting persistent challenges in domestic consumption, a prolonged property downturn, and external trade risks.
November Data Shows Slower Decline in Profits
The National Bureau of Statistics (NBS) reported a 7.3% year-over-year decline in industrial profits for November, an improvement from the 10% drop recorded in October. The data highlights the gradual impact of government measures aimed at revitalizing the industrial sector, which has been hit hard by weak domestic demand and subdued global trade.
Economist Zhou Maohua from China Everbright Bank commented, “The narrower decline in November suggests that recent economic stimulus policies are starting to bear fruit. Improved factory-gate prices also contributed to the stabilization.”
The producer price index (PPI), which measures changes in prices at the factory gate, fell 2.5% year-over-year in November, a smaller decline compared to the 2.9% drop in October.
Economic Outlook for 2024 and Beyond
Despite the slight improvement, China’s industrial profits for the first 11 months of 2024 declined 4.7%, deepening the 4.3% contraction seen in the January-October period. Analysts project this year’s full-year profit decline to be the worst since 2011. When factoring in smaller companies excluded in recent methodologies, the decline could be the sharpest since at least 2000.
The World Bank recently revised its 2024 GDP growth forecast for China to 4.9% from 4.8%, citing stronger-than-expected government support. However, the country faces significant structural challenges, including a slowing housing market and tepid private demand, which could dampen long-term growth prospects.
Industrial Sector: A Mixed Recovery
The industrial sector’s recovery remains uneven, with certain industries like real estate and related sectors continuing to face headwinds. November saw industrial output accelerate, while new home prices declined at their slowest pace in 17 months, offering mixed signals about the broader economy’s health.
“While industrial output has picked up, demand remains insufficient, particularly in real estate and its adjacent industries,” Zhou noted, highlighting the unevenness of the recovery.
Government Measures to Stimulate Growth
China’s leadership has pledged decisive actions to stabilize economic growth, including raising the fiscal deficit, issuing more debt, and loosening monetary policy. Key measures include:
- Special Treasury Bonds: Beijing has agreed to issue a record $411 billion in special treasury bonds in 2024 to fund economic recovery initiatives.
- Direct Fiscal Support: The government plans to enhance social security and boost consumer spending through direct fiscal support.
These measures are expected to provide a short-term boost, but sustained growth will depend on addressing deeper structural issues within the economy.
Performance by Ownership and Sector
Breaking down the data by ownership, the NBS highlighted the following trends for the first 11 months of 2024:
- State-Owned Enterprises: Profits fell by 8.4%, reflecting challenges in managing large-scale projects and meeting efficiency targets.
- Foreign Firms: Posted a more modest 0.8% decline, as external trade dynamics and shifting global supply chains influenced their performance.
- Private Sector: Recorded a 1% decrease, showing resilience but still affected by subdued domestic demand.
Challenges Ahead for China’s Economy
China’s economy continues to face several headwinds:
- Weak Domestic Consumption: Despite stimulus measures, household spending remains restrained, limiting the effectiveness of fiscal policies.
- Prolonged Property Market Downturn: The real estate sector, a major driver of economic activity, struggles to recover amid high debt levels and declining property values.
- Geopolitical Risks: Trade tensions with major economies, including the U.S., pose ongoing risks to China’s export-driven growth model.
To counter these challenges, China will need to focus on structural reforms, including increasing the efficiency of state-owned enterprises, fostering innovation, and transitioning to a consumption-led growth model.
Global Implications
China’s economic trajectory has significant implications for global markets. As the world’s second-largest economy, its industrial performance influences demand for commodities, trade dynamics, and global supply chains. Sluggish growth in China could weigh on global economic recovery efforts, particularly in export-dependent regions.
However, improved profitability in certain industrial segments and targeted government interventions could signal opportunities for investors and businesses looking to tap into China’s evolving market dynamics.
Conclusion
While China’s industrial profits showed a slower rate of decline in November, the road to recovery remains fraught with challenges. The government’s proactive measures to stimulate growth are critical, but long-term stability will require addressing structural inefficiencies and fostering sustainable demand.
As China navigates this complex economic landscape, global businesses and investors will closely watch its policy decisions and economic indicators for signs of recovery or further challenges ahead.
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