Economics

Chinese industrial companies report the largest profit decline of the year: Government struggles for confidence

The drastic profit declines of Chinese industrial companies in September highlight the ongoing economic weakness.

Eulerpool News Oct 28, 2024, 8:00 AM

The profits of large Chinese industrial companies plummeted by 27.1% year-on-year in September – the biggest decline of the year. This drastic development comes at a time when the Chinese government is working intensively to restore confidence in the world's second-largest economy.

The Working Group on Tax Estimates predicted a decline in tax revenues of a total of 58.1 billion euros for the federal government, states, and municipalities by 2028, of which 12.7 billion euros will be in the coming year alone. This correction highlights the ongoing economic weakness and is likely to further intensify the debate on the federal budget. Finance Minister Christian Lindner emphasized during the presentation of the estimate in Washington: "There is no room for distribution policy.

The cause of the drastic profit decline lies in a combination of a persistent real estate downturn and weaker consumer demand. In the third quarter, the gross domestic product grew by 4.6% year on year, while total income was revised down by 58.1 billion euros until 2028. For the current year, the task force expects a revenue decline of 8.7 billion euros, further highlighting the economic challenges.

To counter this development, Beijing introduced a comprehensive package of measures at the end of September aimed at boosting market confidence and supporting the stock and real estate markets. Despite these efforts, analysts are calling for additional fiscal stimuli to revive economic momentum. A crucial event will be the Standing Committee of the National People's Congress meeting from November 4 to 8, where further government spending plans could be decided.

The consumer prices remain near the deflation threshold, with an increase of only 0.4% last month, while producer prices fell by 2.8%. The producer price index, heavily influenced by raw material prices, has been in negative territory for two years. In a statement, the National Bureau of Statistics (NBS) declared that the decline in delivery prices is putting significant pressure on corporate profits and revenues, as demand is classified as "insufficient.

Analysts from Goldman Sachs emphasize that profits in the downstream industries have barely increased compared to pre-crisis levels. Despite these challenges, the Chinese government under Xi Jinping is increasingly focusing on the modernization of industry and production, including investments in clean energy and artificial intelligence (AI). Profits in high-tech sectors managed to increase by 6.3%, offering hope for a technological upswing.

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