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China's Industrial Profits Suffer Second Consecutive Annual Decrease
In 2023, the industrial sector in China came under more pressure as profits dwindled by 2.3%, marking a second consecutive year of decline. The leading factors of this decrease are notably lacklustre domestic and international demand. These unsettling circumstances are unfolding under the shadow of a battered property market and looming deflation threats.
NBS Data Reflects the Profit Decline Trend
The National Bureau of Statistics (NBS) revealed a 4.4% reduction in industrial profits during the first 11 months, compared to the corresponding period the preceding year. The data also highlighted the continuous financial stress on the sector.
Key Contributors to the Profit Slump
Nie Wen, a renowned economist with Hwabao Trust based in Shanghai, primarily attributed the profit tumble to marked drops in factory-gate prices driven by a production surplus in specific industries.
Nevertheless, Nie foresees a possible profit surge around 5%-6% within the year. He attributes this prediction to a gentle demand uptick coupled with historic low inventory levels across several regions, including China, Europe, United States, and Japan. Such trends, in Nie's analysis, should lead to a revival of industrial prices.
Evidence of Profit Recovery by Year End
Signs of a potential rebound became visible by the year's end with industrial profits rising 16.8% compared to the previous December. This increase does present a fall from the November surge of 29.5%, but it also signals the fifth consecutive month of profit growth following a 4% drop in 2022 largely caused by strict COVID-19 measures.
Moreover, certain industries evidenced significant profit growth in 2023. The NBS reported a prominent 22.0% increase in profits for railway, ship, and aerospace transport equipment, largely due to a rise in shipbuilding orders. The automotive industry also saw an upswing with a 5.9% profit boost due to a record high in car manufacturing.
China's Economic Condition and 2024 Forecast
In 2023, China's economic growth sat at 5.2%, though the recovery from the pandemic seems shaky due to several persisting challenges. These include an ongoing property market slump, increased deflation risks, and slower global economic growth, which cast doubt on predictions for 2024.
In an attempt to stabilize the volatile economy and sinking stock markets, the Chinese central bank announced a substantial 50 basis points cut to bank reserves, representing the largest cut in two years.
Despite these measures, analysts suggest the need for a more significant stimulus to ensure more stable economic activity. Nie estimates the GDP target for China will remain around a 5% target for 2024, anticipating an early implementation of existing strategies and the issue of special treasury bonds worth an additional 1 trillion yuan ($140 billion).
Note: The industrial profit data discussed includes companies with minimum annual revenues of 20 million yuan ($2.8 million) from their primary operations.
