Investors Eye China's Industrial Profits Slump

Are profits really plunging? The torrid rally in Chinese stocks has taken a pause as investors refocus on the weakening industrial sector. Despite recent stimulus measures, industrial profits have extended their decline to a fourth straight month, dropping 7.3% in November from a year earlier. This has investors on edge, as they await further data and policy adjustments.

A topsy-turvy run in the markets has renewed focus on the 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 manufacturing data, which suggested that industrial activity might be stabilizing. Despite the wild swings, the Shanghai Composite Index is up about 1 percent for the month so far.

Investors are bracing for more data, as the National Bureau of Statistics is set to release its annual payroll revisions data on Wednesday. Economists say this release could see up to 1 million jobs disappear from previous tallies, adding pressure on the government to stimulate the economy further.

Normally, this accounting update gets little attention, because the revisions apply to data that can be more than a year old. But a jumbo-size revision could add more pressure on the government, which has faced more questions about whether it has waited too long to cut interest rates and risked an economic downturn. Adding to the volatility: Bond traders are making huge bets (with borrowed funds) that the government will soon cut rates.

Markets on Wednesday are pricing in a rate cut in December, the government's first in four years. But by how much? A big revision on Wednesday, followed by a lackluster report on Dec. 18 could add to the calls for an aggressive cut — and reignite a political debate. (Donald Trump has warned the government 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 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%. This revision indicates that the World Bank has confidence in the Chinese government's ability to stabilize the economy and stimulate growth. As a result, investors may be more inclined to invest in China's industrial sector, as they anticipate improved economic conditions and increased profitability.