China’s Industrial Profits Forecast to Recover Despite Economic Challenges

Summary

  • An increase in industrial profits is expected in the range of 5-6% for the current fiscal year, given an uptick in demand and historically low inventories across China, Europe, US, and Japan.
  • Against a backdrop of COVID-19 restrictions, profits dwindled by 4% in 2022. In contrast, however, profits for railway, ship, and aerospace transport equipment saw a 22% increase in 2023.
  • Despite the predicted expansion of China’s economy by 5.2% in 2023, the recovery from the global health crisis remains unstable, influenced by a prolonged property slump, rising deflationary risks, and decelerated worldwide growth.
  • A 50-point cut to bank reserves by China’s central bank signals strong support for the fragile economy and falling stock markets.

Financial Overview

Based on data released by the National Bureau of Statistics (NBS), a 4.4% slide in profits was observed in the first eleven months compared to the same period the previous year. Principal causes for the profits drop in the previous year were primarily low factory-gate prices due to over-capacity in several sectors, states Shanghai Hwabao Trust economist Nie Wen.

Industrial Profits Forecast

Nie predicts that this year, industrial profits will potentially see a rise of between 5% and 6%, courtesy of a nominal increase in demand, alongside record lows in supplies across China, Europe, the U.S., and Japan expected to trigger a recovery in industrial prices.

End Year Profit Projections

In December alone, there was a 16.8% increase of industrial profits compared to the previous year, a decline from the 29.5% surge in November, nonetheless extending gains for five subsequent months.

COVID-19 Impact on Profits

Last year, there was a 4% fall in profits majorly due to stringent COVID-19 restrictions. However, substantial growth in shipbuilding orders resulted in the profits of railway, ship, and aerospace transport equipment augmenting by 22% in 2023. In the same vein, automobile industry earnings increased by 5.9%, credit given to the highest-ever car production.

Economic Outlook and Stimulus Measures

Despite China’s economy expanding by 5.2% in 2023, post-pandemic recovery has been shaky with a prolonged housing downturn, mounting deflationary risks, and slowing global growth casting clouds over the prospect for the present year. Furthermore, China’s central bank introduced a cut to bank reserves by 50 basis points, the largest in two years, thus transmitting a robust signal of support for the brittle economy and the country’s falling stock market.

Future Projections

Nie anticipates that China’s GDP target will remain at 5% for the present year, whilst an extra 1 trillion yuan ($140 billion) in special treasury bonds is likely to be issued. The financial figures for industrial companies with annual revenues exceeding 20 million yuan ($2.8 million) from their principal operations are covered by these industrial profit numbers.

Considering the current economic status, trading decisions related to Asian currencies, commodities such as iron ore, and China-specific ETFs need to factor in these economic trends.

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