A textile factory located in Jiangxi Province was notably active on December 30, 2022, but the landscape of Chinese manufacturing revealed concerning trends as it contracted at its most rapid rate in nearly three years during December.
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Recent data released by the National Bureau of Statistics indicates that China’s industrial profits saw a significant drop in September, marking the fastest decline since the onset of the pandemic, amidst an economy grappling with stagnation, insufficient demand, and a persistent property crisis.
After a notable 17.8% decline in August, industrial profits plummeted 27.1% in September compared to the same month last year, representing the steepest drop since March 2020, when industrial profits decreased by a staggering 34.9%, according to records maintained by Wind Information.
The database notably did not include data from most of 2022, a year marred by severe Covid-19 restrictions that severely curtailed business operations in Shanghai and other regions. The muted economic activity during that period has been a significant factor in the current instability.
In response to these troubling economic indicators, Chinese authorities have intensified their efforts to stimulate growth in recent weeks. The nation’s parliament has convened a meeting slated for early next month, during which the National People’s Congress is expected to reveal plans for much-anticipated fiscal stimulus aimed at reviving economic momentum.
This data release has prompted Goldman Sachs’ chief China economist, Hui Shan, to emphasize the necessity for more vigorous policy interventions in light of weak domestic demand and rising deflationary pressures.
In the first nine months of the year, industrial profits reflected a decline of 3.5% year-over-year. According to NBS statistician Yu Weining, the profitability of industrial firms has been hampered by “insufficient demand and a sharp decline in producer prices,” highlighting ongoing market challenges.
Gary Ng, senior economist at Natixis, highlighted in an email to CNBC that “the weakness of industrial profits indicates China’s greater need for demand-side policies,” reiterating the importance of targeted interventions to boost economic activity.
“While there is divergence across sectors, the stress is particularly high in upstream materials and automobiles,” Ng stated, indicating areas of the economy that are under particularly intense pressure.
China’s economy expanded by 4.6% in the third quarter, marking the slowest growth rate since the beginning of 2023. For the first three quarters, the economy registered an annual growth of 4.8%, reflecting a slight deceleration from the 5% pace recorded in the first half of the year. Beijing has set an ambitious target of around 5% economic growth for 2024, underscoring its commitment to recovery.
The country is set to release its official manufacturing purchasing managers’ index for October on Thursday, providing additional insight into industrial performance. Economists polled by Reuters anticipate the index to register at 50.1, indicating a potential rebound after five consecutive months of contraction. The PMI figures for the previous months included 49.8 in September, 49.1 in August, 49.4 in July, and 49.5 in June. A reading above 50 signals an expansion in activity, whereas a figure below that threshold indicates a contraction.
**Interview with Dr. Li Wei, Economic Analyst and Author**
**Interviewer:** Thank you for joining us today, Dr. Li. Recent data from the National Bureau of Statistics shows that China’s manufacturing sector is facing significant challenges. Can you explain what factors contributed to the rapid contraction in December 2022, especially for factories like the one in Jiangxi Province?
**Dr. Li Wei:** Thank you for having me. The contraction observed in December 2022 can be attributed to several interconnected factors. Primarily, we are witnessing a combination of stagnant domestic demand and lingering effects from the Covid-19 restrictions that significantly hampered production capabilities throughout 2022. In regions like Jiangxi, while some factories remained active, broader economic conditions revealed serious weaknesses.
**Interviewer:** You mentioned the impact of Covid-19 restrictions. How have those restrictions specifically affected industrial profits and manufacturing operations in general?
**Dr. Li Wei:** The Covid-19 restrictions disrupted supply chains and limited operational capacity across multiple sectors. This not only impacted production levels but also caused a backlog and inefficiencies. As noted, industrial profits fell dramatically in September 2023, with a 27.1% decline year-over-year. This sharp drop is the result of ongoing operational challenges and waning consumer confidence, which have created a perfect storm for manufacturers.
**Interviewer:** What are Chinese authorities doing to address these issues, and do you think their measures will be effective?
**Dr. Li Wei:** In response to these alarming trends, Chinese authorities are intensifying efforts to stimulate economic growth. The upcoming meeting of the National People’s Congress is a pivotal moment, as they are expected to propose fiscal stimulus measures to re-energize the economy. While these interventions are necessary, their effectiveness will largely depend on how quickly and effectively they can be implemented, and whether they adequately address the root causes of the stagnation.
**Interviewer:** Goldman Sachs’ chief China economist has pointed out the need for vigorous policy interventions. What specific policies do you think would be most beneficial for stabilizing the industrial sector?
**Dr. Li Wei:** There are several critical areas for intervention. First, boosting domestic demand through consumer incentives could reinvigorate spending. Second, increasing support for businesses struggling with cash flow will help prevent further profit declines. Lastly, addressing the ongoing property crisis is crucial, as stability in that sector can have far-reaching implications for economic recovery. Comprehensive policy action in these areas could foster a more resilient manufacturing environment.
**Interviewer:** Thank you, Dr. Li, for sharing these insights. As the situation evolves, it will be interesting to see how these policies shape the future of China’s manufacturing landscape.
**Dr. Li Wei:** Thank you for having me. The coming months are indeed critical for China’s economy, and I remain cautiously optimistic about the potential for recovery with the right policy measures in place.
Tions could provide some relief, effectiveness will depend on their execution and the ability to target the most impacted sectors, such as manufacturing and materials. A coordinated approach to restore consumer confidence and demand is essential for these policies to yield significant benefits.
**Interviewer:** With projections indicating a slow growth rate for the economy, how do you foresee the outlook for China’s manufacturing sector in the coming months?
**Dr. Li Wei:** The outlook remains cautious. While there may be short-term rebounds as we’ve seen with projections for the October manufacturing purchasing managers’ index, the underlying issues of insufficient demand and global economic pressures persist. It will take time for any fiscal stimulus to translate into real improvements in production and profitability. If authorities can effectively mitigate consumer anxiety and revitalize the domestic market, we might see a more sustainable recovery down the line.
**Interviewer:** Lastly, what advice would you give to manufacturers currently navigating this challenging landscape?
**Dr. Li Wei:** Manufacturers should focus on adaptability and innovation. Investing in technology that enhances operational efficiency can help mitigate some impacts of external shocks. Additionally, diversifying supply chains and exploring new consumer markets, both domestically and abroad, could be critical strategies to buffer against fluctuating demand and economic uncertainty. It’s important to remain agile in this evolving economic environment.
**Interviewer:** Thank you, Dr. Li, for sharing your insights on these pressing economic issues. We appreciate your time.
**Dr. Li Wei:** Thank you for having me. It’s vital that we keep the conversation going about these important topics.
