China’s industrial sector is facing significant challenges, with profits declining at an alarming rate, signaling deeper issues within the economy. Data from the National Bureau of Statistics (NBS) reveals that industrial profits dropped by 27.1% in September compared to the previous year, marking the steepest decline since March 2020. This follows a 17.8% decrease in August, and the cumulative effect underscores a troubling trend for the world’s second-largest economy, which is grappling with slow growth, inadequate demand, and a persistent property crisis.

The NBS data highlights that from January to September, industrial profits fell by 3.5% year-on-year. Insufficient domestic demand and declining producer prices have severely impacted the profitability of industrial firms, with the producer price index (PPI) experiencing a 2.8% year-on-year decrease in September, surpassing the 1.8% decline recorded in August. This ongoing deflationary pressure is raising alarms among economists and policymakers alike.

Goldman Sachs Chief China Economist Hui Shan emphasized the urgency for “more forceful policy responses” to stimulate demand and alleviate deflationary pressures. The Chinese government has recognized the need for intervention, recently ramping up measures to support economic growth. A meeting of the National People’s Congress is scheduled for early next month, where the government is expected to announce fiscal stimulus plans aimed at revitalizing the economy.

The industrial sector’s struggles are compounded by a broader economic landscape marked by sluggish growth. China’s economy grew by just 4.6% in the third quarter, the slowest pace since early 2023. The first three quarters of the year recorded an annual growth rate of 4.8%, slightly below the 5% growth rate seen in the first half. The government has set a target of around 5% economic growth for 2024, which may now be in jeopardy given the current trajectory.

Sectoral disparities also reveal a nuanced picture of the economic challenges at play. While certain industries remain resilient, upstream materials and the automotive sector are under particularly intense pressure. Gary Ng, a senior economist at Natixis, pointed out that the declining industrial profits reflect an urgent need for demand-side policies to boost economic activity.

The upcoming release of the official manufacturing purchasing managers’ index (PMI) for October is highly anticipated, with economists polled by Reuters expecting a slight rebound to 50.1. This would mark a shift from five months of contraction, where the PMI readings have been consistently below the critical 50-point mark, indicating contraction rather than expansion.

As China grapples with these economic challenges, the call for decisive and effective policy measures becomes increasingly crucial. The government’s ability to address demand-side issues and stimulate consumer confidence will play a pivotal role in shaping the trajectory of the economy in the coming months. Without a robust response, the risk of prolonged stagnation looms large, further impacting not only industrial profits but the overall health of the Chinese economy and its role in the global marketplace.

In conclusion, China’s current economic predicament serves as a stark reminder of the delicate balance required to maintain growth in an interconnected global economy. The forthcoming policy responses and their effectiveness will be closely monitored, as they may determine whether the country can navigate its way out of this economic slump and set a more sustainable growth path for the future.

(Adapted from CNBC.com)

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