Reversing Profit Trends in China's Industrial Sector: A Catalyst for Manufacturing Exposure?

China's industrial sector has experienced a volatile 2025, marked by sharp profit declines and tentative signs of recovery. According to a report by Bloomberg, industrial profits in May 2025 plummeted by 9.1% year-on-year—the largest drop since October 2024—driven by weak domestic demand and falling product prices China’s industrial profits plunge 9.1% in May - CNBC^[1]. However, by June and July, the trend showed early signs of stabilization. The equipment manufacturing sector, for instance, saw profits surge from a 2.8% decline to a 9.6% increase, while high-tech manufacturing recorded a 9% year-on-year gain CX Briefing: China’s Industrial Profit Drop Narrows - Caixin Global^[2]. This partial recovery was bolstered by government measures to curb overcapacity, which eased competitive pressures and supported corporate margins China’s industrial firms report faster profit growth amid economic... - China Daily^[3].

Yet, the sector faced renewed headwinds in September, with profits collapsing by 27.1% year-on-year—the steepest monthly drop of the year—amid a struggling property sector and persistent deflationary pressures China's Sept industrial profits post steepest fall of the… - Reuters^[4]. Despite these challenges, policy interventions remain a critical catalyst. The Chinese government's focus on structural upgrades, including the "Made in China 2025" initiative, underscores a long-term strategy to shift toward high-tech and green-energy manufacturing Made in China 2025 set the tempo of China’s industrial ambitions - WEF^[5]. This aligns with the broader "dual circulation" model, which prioritizes domestic consumption while maintaining global trade resilience China's 2025 H2 outlook: Policy signals and market trajectory - CGTN^[6].

For investors, the interplay between profit trends and equity valuations in A-shares and export-oriented sectors presents compelling opportunities. As of September 2025, the China A-shares market traded at a trailing P/E ratio of 14.80, with a forward P/E of 13.21—well within historical averages and signaling attractive valuations China SSE Stock Market P/E & Earnings 2025 - Siblis Research^[7]. Export-oriented equities, though impacted by U.S. tariffs, have demonstrated resilience through diversification to markets like the EU and ASEAN China’s Economy in April 2025: Strong Exports and... - China Briefing^[8]. For example, the KraneShares SSE STAR Market 50 Index ETF returned 82% year-to-date as of September 2025, reflecting strong performance in innovation-driven sectors 7 Best China ETFs for August 2025 - NerdWallet^[9].

Sector rotation strategies are increasingly favoring policy-supported industries. Goldman Sachs highlights that A-shares are trading near their 5-year average forward P/E and offer a 19% return potential versus 10% for MSCI China, driven by fiscal stimulus and structural reforms Rotation from A to H to A - 10 charts on China - Premia Partners^[10]. Sectors such as semiconductors, robotics, and AI-enhanced manufacturing are particularly well-positioned, with earnings revisions improving since the market bottom in September 2024 China Outlook 2025 | China Equity Market Outlook - Capital Markets^[11]. Meanwhile, foreign fund flows into China equities surged by $12.7 billion following a September 2024 stimulus package, with onshore private funds and high-net-worth investors driving demand Have equity flows gone back to China after the stimulus announcement? - JPMorgan^[12].

However, risks persist. Deflationary pressures, overcapacity in traditional industries, and geopolitical uncertainties—such as U.S. tariff escalations—could temper near-term gains. The OECD forecasts China's economic growth to slow to 4.7% in 2025 and 4.3% in 2026, citing high precautionary savings and real estate corrections China: OECD Economic Outlook, Volume 2025 Issue 1 - OECD^[13]. Investors must also navigate uneven sector performance: while high-tech manufacturing thrives, mining and traditional industries face double-digit profit declines China's industrial profits decline: Economic impact analysis - Discovery Alert^[14].

In conclusion, the reversal of China's industrial profit trends, though fragile, offers a strategic entry point for investors seeking exposure to manufacturing and export-oriented equities. A-shares' attractive valuations, combined with targeted policy support and sector-specific resilience, position them as a re-rating candidate. However, success hinges on careful sector selection and a long-term perspective to navigate macroeconomic headwinds.