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China’s Industrial Profits Drop, Signaling More Pain Ahead

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China’s industrial profits fall

China’s NBS (National Bureau of Statistics) reported its industrial profits for November on December 27. The data showed the first contraction in profits for industrial companies since December 2015. Profits fell 1.8% YoY (year-over-year) to 594.8 billion Chinese yuan in the month. According to the NBS, slowing sales growth combined with increasing factory gate inflation and rising costs led to the fall in industrial profits.

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The Chinese economy has been facing increased headwinds lately. One of the major factors impacting China’s growth outlook and investor sentiment has been the ongoing trade conflict between the United States and China (FXI). Apart from that, slowing domestic demand, weaker property market growth, and deleveraging have also been negatively affecting China’s economy.

New data points mean more pain

Every new data point that comes out of China seems to confirm the market’s concerns about the slowdown in the country. Its November trade data show that exports and imports have been growing less than expected. China’s November car sales data were released on December 11. The data showed a 14% YoY fall in sales. Unless we see a major increase in December, which isn’t likely, China seems likely to report its first yearly decline in automobile sales since at least 1990, according to Reuters.

Strong measures needed to buck the downturn

These data points signal that China’s slowdown is deepening and that it may need interest rate cuts, policy support from the government, and firmer credit growth policies to weather this weakness. Moreover, it would do China well to resolve its trade differences with the United States (SPY) (IVV) sooner rather than later to get its economy back on track. US companies (DIA) such as Apple (AAPL), NVIDIA (NVDA), Micron Technology (MU), and many others with operations in China due to its cost advantage might consider shifting their supply chains away from China if the tariffs last longer than expected.

To learn more about how the trade war is affecting China and how it’s trying to recoup some of the losses, read Why China Needs More Than a Trade War Truce to Buck the Slowdown.

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