China's industrial sector is facing significant challenges, with industrial profits declining by 10% in October compared to the same month last year. This follows a 27.1% year-on-year decrease in September, the largest contraction since March 2020. Profits for industrial firms in the first ten months of the year fell by 4.3%, worsening from the 3.5% decline in the first nine months. These figures highlight the struggles in the manufacturing and utility sectors, raising concerns about the overall financial health of China's industrial landscape.
Despite stimulus measures introduced by Beijing, corporate earnings have been minimally impacted, with deflationary pressures continuing to weigh on the economy. The consumer price index (CPI) in October showed a modest increase of 0.3% year-on-year, the slowest growth since June. The producer price index (PPI) experienced a more significant decline, falling by 2.9% compared to the previous year, indicating a deepening deflationary trend. These economic indicators suggest that while some sectors may benefit from government interventions, the broader industrial environment remains fragile.
While industrial profits decline, other areas of the economy show resilience. October retail sales grew by 4.8% year-on-year, exceeding expectations and indicating a slight rebound in consumer confidence. The unemployment rate also improved slightly, decreasing to 5% from 5.1% in September. These positive developments suggest that, despite challenges in the industrial sector, there are pockets of growth that could contribute to a more balanced economic recovery.
However, the overall economic landscape remains concerning, particularly in the real estate sector, which saw a significant decline of 10.3% year-on-year through October. This drop is steeper than the 10.1% decline in the previous month, highlighting ongoing struggles in the housing market. The combination of lackluster domestic consumption and a prolonged downturn in real estate has contributed to the slowest economic growth rate in the third quarter since early 2023. Chinese authorities have increased stimulus measures to achieve the government's growth target of "around 5%."
As China prepares to release its official manufacturing purchasing managers' index (PMI) for November, analysts are cautiously optimistic. A Reuters poll of economists expects a PMI reading of 50.3, indicating a slight expansion in manufacturing activity compared to the 50.1 recorded in October. This upcoming data will be crucial in assessing the effectiveness of recent stimulus measures and the manufacturing sector's recovery.
The global markets closely monitor China's economic situation as the world's second-largest economy faces a complex mix of challenges. The interplay between industrial profits, consumer spending, and real estate performance will be critical in determining the trajectory of economic recovery. The effectiveness of the authorities' measures to stabilize the economy will shape the outlook for domestic and international investors.