China’s Industrial Profits Decline

BEIJING (Reuters) – China’s industrial profits experienced a significant contraction in August, marking the largest decline of the year, according to official data released on Friday. This downturn adds to a recent series of dismal business readings, indicating increasing pressure on the Chinese economy.

Profits plummeted 17.8% in August compared to the previous year, following a 4.1% increase in July. Additionally, earnings during the first eight months of the year rose at a slower 0.5% pace, down from 3.6% growth in the January-July period, as reported by the National Bureau of Statistics (NBS).

The decline in August was attributed to several factors, including a lack of effective market demand and the adverse effects of natural disasters such as high temperatures and heavy rains. According to NBS statistician Wei Ning, these elements significantly impacted profit outcomes.

A high statistical base from the previous year also contributed to the sharp reversal, with declines noted in the automobile and equipment manufacturing industries, according to Zhou Maohua, a macroeconomic researcher at China Everbright Bank.

Data released earlier this month has intensified concerns about a sluggish recovery, leading global brokerages to revise their 2024 growth forecasts for China downwards, below the official target of around 5%.

The weak domestic demand highlights a major obstacle for the economy amidst growing job security concerns and declining property sales and investments. For example, domestic dairy giant Inner Mongolia Yili Industrial Group Co reported a 40% decrease in net profit for the second quarter.

Wei noted that “domestic consumer demand remains weak while the external environment is complex and changeable.” To foster optimism in the economy, China’s central bank announced the most aggressive stimulus measures since the pandemic on Tuesday, including a 50 basis point cut in banks' reserve requirements.

However, analysts caution that additional demand-side easing, particularly fiscal assistance, will be crucial to restore confidence. Chinese leaders stated on Thursday their commitment to “necessary fiscal spending” to achieve this year’s economic growth target.

China plans to issue $284 billion in sovereign debt this year as part of a new fiscal stimulus package. A portion of the funds will be raised through special bonds, which are intended to provide a monthly allowance of $114 per child to households with two or more children, excluding the first child.

State-owned firms experienced a 1.3% decline in profits from January to August, while foreign firms reported a 6.9% increase. Private-sector companies saw a 2.6% rise, according to NBS data breakdown.

Industrial profit figures include firms with annual revenues of at least 20 million yuan ($2.83 million) from their main operations.

($1 = 7.0565 Chinese yuan)