Profits at China's industrial companies rise as deflation persists

By Bloomberg News

Profits at China’s industrial companies rose at a much slower pace in October than the prior month as deflationary pressures persisted, suggesting the economic recovery remains fragile in the final stretch of 2023. 
 

Industrial profits increased 2.7 per cent from a year ago, according to data published by the National Bureau of Statistics on Monday. The pace eased significantly from September’s 11.9 per cent gain and August’s 17.2 per cent jump.

For the first 10 months of 2023, profits fell 7.8 per cent from the same period a year earlier, moderating slightly from the 9 per cent fall through the first nine months. 

China’s onshore CSI 300 Index and a gauge of Chinese stocks listed in Hong Kong both dropped more than 1 per cent in early trading Monday to rank among the worst performers in Asia Pacific as investor sentiment remained weak.

The profits data reflected some pressures on commodity prices, according to Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. 

“Weak domestic demand also added to weakness in profits,” he said. “We continue to see more downside risks to commodity prices, which will weigh on the profit outlook.”

Companies in China have finally started to see profit growth as the government has stepped up economic stimulus, while a destocking cycle at firms is also likely nearing an end. But there are still lingering weaknesses within the world’s second-largest economy that are weighing on activity. Manufacturing activity contracted last month and the years-long property slump remains a drag. And while factory-gate deflation had been easing in recent months, prices still dropped 2.6 per cent last month from a year ago.

Other indicators showed a mixed performance for China’s economy in October. While consumer spending picked up, those figures were aided by a favorable comparison to lockdown-hit 2022. A deepening contraction in property investment has fueled expectations the government will have to roll out more stimulus.

What Bloomberg Economics Says ... 
 

“The year-on-year rise in China’s industrial profits in October was cold comfort — it was much smaller than September’s increase and it benefited from a comparison with a dismal period for earnings in 2022, when the economy was struggling through the end of Covid Zero. In that context, the data are another sign of weak momentum in the industrial sector. This strengthens our view that policies need to stay accommodative into next year to support a recovery in demand.”

— Eric Zhu, economist 

Policymakers are finalizing a draft list of developers eligible for financial support — indicating a pivot by Beijing to help some of the most distressed builders — while banks have been asked by lawmakers to increasing funding for the sector.

The decline in profits at state-owned enterprises moderated to 9.9 per cent in the January-to-October period, compared to an 11.5 per cent decrease in the time frame through September. Profits at private firms dropped 1.9 per cent in the first 10 months, while those at foreign firms fell 10.2 per cent.

The subdued profit growth will likely keep industrial companies cautious about expanding or hiring more, which in turn could add more pressure on prices. Independent analysis of online job listings and official economic and household surveys indicate the nation’s job market worsened in the third quarter of the year, with wages weighed down and hence squeezing demand and consumer prices.