China’s Factory Profits Slide Signals Deeper Economic Strain

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China’s industrial sector, long seen as the backbone of its economy, is showing renewed signs of stress. A sharp drop in factory profits highlights how weak domestic demand is undercutting growth, despite resilient exports and repeated policy pledges from Beijing.

The latest data adds urgency to calls for stronger stimulus as China tries to stabilise its post-pandemic recovery.

Industrial Profits Take a Steep Turn Lower

China’s industrial firms recorded their sharpest profit decline in more than a year in November, underscoring the fragility of the country’s economic rebound.

Profits fell 13.1% year-on-year, accelerating sharply from a 5.5% decline in October, according to figures released by the National Bureau of Statistics (NBS) on Saturday. The downturn came even as exports exceeded expectations, highlighting the growing imbalance between external demand and weak spending at home.

Persistent factory-gate deflation continues to squeeze margins, keeping pressure on companies and policymakers alike.

Domestic Demand Remains the Core Weakness

While China’s export sector has shown pockets of resilience, domestic consumption remains stubbornly soft. Households have been cautious amid job uncertainty, falling prices, and a prolonged property market slump.

This weakness is increasingly visible in industrial earnings, which are highly sensitive to domestic sales and pricing power. Analysts say the data reinforces concerns that China’s recovery is losing momentum rather than gaining traction.

For policymakers, the numbers underline a familiar challenge: exports alone cannot carry growth in a $19 trillion economy.

Year-to-Date Gains Nearly Erased

Looking beyond November, the broader trend is equally sobering.

For the first 11 months of the year, industrial profits edged up just 0.1% compared with the same period last year. That marked a sharp slowdown from 1.9% growth recorded between January and October.

A major drag came from the coal mining and washing industry, where profits plunged 47.3%, reflecting weaker energy demand and pricing pressures. The decline in such a large, traditional sector has weighed heavily on overall industrial performance.

Economy Loses Steam Toward Year-End

Economic momentum across China softened as the year drew to a close, with no major new stimulus measures rolled out so far.

Observers note that Beijing appears cautious, taking some reassurance from indicators suggesting the government’s 2025 growth target of around 5% may still be within reach. A relative easing of U.S.-China trade tensions has also helped stabilise the external environment.

Still, market expectations increasingly point to the need for additional policy support in 2025, particularly to revive domestic demand and restore confidence.

Official View: Recovery Needs Stronger Foundations

In an accompanying statement, NBS Chief Statistician Yu Weining acknowledged the ongoing challenges facing industrial firms.

He noted that, against a volatile global backdrop and amid continued structural adjustment as China shifts from older industries to new growth drivers, the recovery in industrial profitability “still needs to be put on a firmer footing.”

The comment reflects a growing recognition within official circles that current improvements are uneven and vulnerable to setbacks.

Independent Estimates Paint a Weaker Picture

External analysts are even more cautious about China’s underlying growth trajectory.

The Rhodium Group, a U.S.-based think tank, estimates that China’s economy grew by just 2.5% to 3% in 2025, roughly half the pace suggested by official data. The group attributes much of the slowdown to a sharp collapse in fixed-asset investment during the second half of the year.

If accurate, those estimates raise further questions about the sustainability of China’s recovery without more aggressive intervention.

Bright Spots in Autos and High-Tech Manufacturing

Despite the broader slowdown, some sectors continue to outperform.

The automotive industry reported a 7.5% rise in profits, accelerating by 3.1 percentage points compared with the January–October period. The gains reflect strong demand for electric vehicles and continued government support for the sector.

High-tech manufacturing also stood out, with profits rising 10.0% year-on-year, an improvement of 2.0 percentage points from earlier in the year. These sectors align with Beijing’s long-term strategy of shifting growth toward advanced manufacturing and innovation.

Policy Signals: Fiscal Support Still Central

At an agenda-setting meeting earlier this month, China’s top policymakers pledged to maintain a “proactive” fiscal policy in the coming year.

The focus, officials said, will be on supporting both consumption and investment, while also stabilising employment and reviving price growth. Authorities have repeatedly stressed the need to lift household spending and address the prolonged downturn in the property market.

However, concrete details on the scale or timing of new measures have yet to be announced.

What Comes Next for China’s Economy

The November profit data reinforces a central theme of China’s post-pandemic recovery: progress has been uneven, and domestic demand remains the weakest link.

Without stronger policy action, analysts warn that falling profits could lead companies to cut back on hiring and investment, creating a feedback loop that further dampens growth. At the same time, Beijing must balance stimulus efforts against concerns about debt and financial stability.

How policymakers navigate this trade-off in 2025 will be critical for China’s economic outlook and for global markets closely tied to its performance.

Final Takeaway

China’s sharp drop in industrial profits is more than a monthly data point. It is a reminder that the country’s recovery remains fragile, heavily reliant on exports, and constrained by weak consumer confidence.

As pressure mounts on policymakers to act, the coming months may determine whether China can put its industrial sector, and broader economy back on firmer ground.

 

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