Investors Eye China's Industrial Profits Slump

Are profits really plunging? The recent rally in global markets has taken a pause as investors refocus on China's weakening industrial profits. With inflation in retreat and economic growth slowing, the steady decline in industrial earnings is expected to receive added attention from investors and policymakers alike. On Sunday, markets will face another big test when the National Bureau of Statistics of China publishes its latest industrial profits data, a release that has investors on edge.

A volatile run in the markets has renewed focus on China's economy. Weaker industrial profits at the start of the month helped prompt a sell-off in global stocks and other risky assets. But investors stormed back into the markets last week after better-than-expected retail data, which suggested that consumer resilience might help avert a slowdown. Despite the wild swings, the S&P 500 is up about 1 percent for August so far.

Investors are bracing for Sunday’s industrial profits figures, which economists say could see another significant decline. Normally, this data release gets little attention, but a continued slump in profits could add more pressure on Chinese policymakers to implement further stimulus measures. Adding to the volatility: Bond traders are making huge bets (with borrowed funds) that the People's Bank of China will soon cut interest rates.

Markets on Sunday are pricing in a rate cut in September, the PBOC's first in four years. But by how much? A big decline in industrial profits, followed by a lackluster report on Sept. 6 could add to the calls for an aggressive cut — and reignite a political debate. (Donald Trump has warned the PBOC not to cut until after Election Day, while Senator Elizabeth Warren and other Democrats have urged the central bank not to delay.)

The World Bank on Thursday raised its forecast for China's economic growth in 2024 and 2025, reflecting the recent policy adjustments. It now expects China's GDP to grow 4.9% in 2024 compared with its previous projection of 4.8%, while in 2025, China's GDP is expected to expand by 4.5%, higher than the organization's prior forecast of 4.1%. However, the World Bank cautioned that China's embattled property sector, alongside subdued household and business confidence, will remain headwinds to its growth.

The decline in industrial profits could have significant implications for the global economy as well. China is the world's largest manufacturing economy and a major exporter of goods, so any contraction in its industrial sector could lead to decreased global demand for raw materials and finished products. This, in turn, could result in lower commodity prices, which could have a negative impact on countries that rely heavily on commodity exports. Moreover, a decline in China's industrial capacity could disrupt global supply chains and lead to increased costs for international businesses that rely on Chinese manufacturers for their production needs.

As investors and financial markets await further policy announcements during a key legislative session scheduled for November 4 to 8, when China's National People's Congress (NPC) will convene to discuss economic priorities, they are closely watching for additional fiscal stimulus, including potential measures like increased public borrowing, larger-scale infrastructure investments, and expanded social spending. Yet opinions are divided as to whether substantial new stimulus will be introduced this year. Some analysts argue that while targeted fiscal measures may be announced in November, China is unlikely to launch the large-scale stimulus seen in previous economic downturns.

Ding Shuang, an economist at Standard Chartered, suggested that policymakers may favor cautious fiscal management to avoid further increasing debt levels. “We may see the government approve some support measures, particularly for sectors facing acute stress, but a broad-based stimulus package may be held back until there are signs of deeper economic distress,” Ding noted. Others point to China's emphasis on sustainable economic growth and concerns over accumulating debt.

In conclusion, the continued decline in China's industrial profits is a cause for concern for investors and policymakers alike. As the world's second-largest economy grapples with disinflation, weak consumer demand, and a prolonged downturn in the property market, targeted policy interventions and fiscal stimulus measures will be crucial to support the recovery of industrial profits and mitigate the impact on the broader economy.