China’s industrial profits decline amid economic challenges

[WORLD] China's industrial sector continues to confront economic headwinds, with profits falling in the first two months of 2024, indicating continued issues in domestic demand, weak global trade, and pricing pressures. According to the National Bureau of Statistics (NBS), industrial enterprises' combined profits fell 5.5% year on year from January to February, with a minor improvement in the second half of 2023.

Sluggish Demand and Deflationary Pressures

The drop in industrial profitability highlights the ongoing challenges of China's economic recovery following the COVID-19 outbreak and property collapse. Although Beijing has implemented supporting measures including as tax reductions and monetary easing, consumer demand remains low, and global trade concerns continue to weigh on manufacturing.

Analysts believe that dropping factory-gate prices, a crucial measure of industrial activity, have contributed significantly to profit erosion. The NBS Producer Price Index (PPI) fell 2.7% year on year in February, extending the sector's deflationary trend that had been in place for months.

Zhou Maohua, an economist with China Everbright Bank, stated that the industrial sector is still experiencing "overcapacity in certain industries, high debt burdens, and soft external demand."

Sector-Wise Breakdown: Winners and Losers

While the overall industrial landscape is faltering, some sectors have outperformed others. The high-tech manufacturing and renewable energy industries have remained resilient, aided by government subsidies and global demand for green technologies.

Traditional heavy sectors, such as steel, chemicals, and cement, continue to experience earnings losses due to slow infrastructure spending and real estate issues. The real estate sector, which has long been a backbone of China's economy, continues to decline, lowering demand for raw materials and construction-related sectors.

Foreign Trade Challenges Add to the Strain

Geopolitical concerns and Western countries' protectionist trade practices have hampered China's exports. U.S. and European steps to reduce reliance on Chinese commodities, particularly in the semiconductor and renewable energy sectors, have reduced trade volumes.

Furthermore, continuous supply chain developments, with international corporations diversifying their production sites away from China, offer long-term challenges to the country's industrial dominance.

Policy Response and Economic Outlook

In reaction to the slowdown, Chinese leaders have promised to provide economic stimulus in 2024. The government has reduced key interest rates and other liquidity measures to assist struggling enterprises. Beijing is also promoting domestic consumption and technology innovation as growth opportunities.

Despite these efforts, many analysts warn that a true recovery in industrial profitability may take time due to fundamental changes in China's economy. The property sector downturn, low consumer sentiment, and global economic uncertainty remain important obstacles.

"China's growth model is evolving, and while industrial profits may continue to face pressure in the short term, sectors like technology and green energy offer new growth potential," said Zhang Liqun, a researcher at the State Council's Development Research Center.

China's industrial sector continues under pressure as profits fall amid weak local demand, global trade concerns, and deflationary pressures. While policy assistance measures may provide some relief, a durable return to profitability will most likely be dependent on broader economic stability and modifications in industrial strategy. As China navigates these hurdles, its ability to shift toward high-value manufacturing and increase domestic demand will be critical in determining the country's economic direction in the coming years.