Navigating China's Industrial Decline: Finding Opportunities in Aerospace, Marine, and Stimulus-Driven Sectors Amid Deflation

The decline in China's industrial profits in Q2 2025—highlighted by a 9.1% year-on-year drop in May—has sparked concerns about deflationary pressures and trade tensions. Yet, beneath the macroeconomic challenges, select sectors are proving resilient. Aerospace, marine industries, and consumer-facing sectors supported by domestic stimulus offer promising investment avenues, while auto and property-linked industries remain vulnerable to structural headwinds. This analysis identifies opportunities and risks, grounded in policy trends and sectoral performance.

Sectors to Watch: Resilience Amid the Slump

1. Aerospace & Aviation: A Policy-Backed Growth Engine

China's aerospace sector has defied broader industrial declines, with profits in biopharmaceuticals and aircraft manufacturing rising 9% year-on-year through April 2025. Government prioritization of high-tech industries and the Belt and Road Initiative (BRI) are driving demand for advanced aviation and space technologies. State-owned enterprises (SOEs) like AVIC International Holding Corp (00202.HK) and its subsidiaries are at the forefront of this push, benefiting from subsidies and strategic projects like the Shenzhou spacecraft program.

Investment Opportunity:
Focus on firms tied to military-civil fusion initiatives (e.g., drone manufacturing) and commercial aviation. For example, COMAC's C919 narrow-body jet (though not publicly listed, its suppliers like Xi'an Aircraft Industry are critical) could gain traction as China seeks to reduce reliance on Boeing/Airbus.

2. Marine Industries: Infrastructure and Export Resilience

Marine sectors, including shipping and offshore engineering, have shown resilience due to strong exports to the EU (+3.2% yoy) and ASEAN (+10.5% yoy). State-backed firms like COSCO Shipping Holdings (601866.SS) and China Merchants Port Holdings are beneficiaries of Belt and Road port expansions and global supply chain diversification.

Why Now?:
- Trade Diversification: Reduced U.S. exports (down 10% yoy) have shifted focus to Asian markets, where marine logistics are critical.
- Green Transition: Marine industries are integrating renewable energy projects (e.g., offshore wind farms), aligning with China's “dual carbon” goals.

3. Consumer-Facing Sectors: Stimulus-Driven Demand

Domestic stimulus measures, including subsidies for household appliances and communication equipment, have fueled a 6.4% rise in retail sales in May—the strongest since late 2023. Firms like Haier智家 (600690.SH) and Midea (000333.SZ) have seen surges in sales of energy-efficient appliances, aided by trade-in programs.

Key Data:
- Household appliance profits rose 15% yoy (Jan-Apr 2025), driven by government incentives.
- Online retail grew 8.5% yoy, underscoring digital consumption's role in offsetting deflation.

Sectors to Avoid: Auto and Property-Linked Industries

Auto Sector: Trapped in a Price War

Automotive profits fell 5.1% yoy due to intense competition and falling prices. Despite subsidies, firms like SAIC Motor (600104.SS) face overcapacity and weak global demand for conventional vehicles. The sector's reliance on U.S.-bound exports (down 8.5% yoy) and domestic price cuts makes it vulnerable to further declines.

Real Estate: No Near-Term Recovery

Property investment plummeted 10.7% yoy (Jan-May 2025), with falling prices and overleveraged developers stifling recovery. Avoid房企 stocks (e.g., Evergrande, China Vanke) until liquidity improves—a distant prospect without aggressive policy easing.

Policy-Driven Opportunities: Where the State Backs Growth

The Chinese government's “high-quality growth” agenda prioritizes tech innovation and domestic consumption. Look for:
- State-backed tech firms: Those in semiconductors, AI, or green energy (e.g., TCL Technology for display tech, Envision Energy for wind turbines).
- Export-resilient firms: Marine and aerospace companies with BRI exposure or non-U.S. market focus.

Investment Recommendations

1. Selective Exposure to Aerospace:

2. Invest in aerospace suppliers (e.g., AVIC International) or ETFs tracking China's defense/tech sectors (e.g., CSI 300 Defense Index).

3. Marine Logistics and Ports:

4. Consider COSCO Shipping (601866.SS) or port operators like Qingdao Port (601298.SH), which benefit from ASEAN trade growth.

5. Consumer Staples and Appliances:

6. Target firms like Haier智家 (600690.SH) with strong e-commerce ties and government-backed product upgrades.

7. Avoid Auto and Property:

8. Steer clear of auto stocks until price wars subside and property developers until debt restructuring is complete.

Conclusion

China's industrial decline masks pockets of opportunity in aerospace, marine industries, and stimulus-supported consumption. Investors should prioritize sectors aligned with policy goals (tech, infrastructure) and avoid overexposed industries. While deflation and trade tensions persist, strategic bets on state-backed resilience and export diversification could yield outsized returns.

Stay agile, focus on policy tailwinds, and avoid the sectors dragging down the economy.