China’s Industrial Profits See First Decline in 3 Years, May Be Set to Worsen in 2019

December 28, 2018 Updated: December 28, 2018

BEIJING—Earnings at China’s industrial firms in November dropped for the first time in nearly three years, as slackening external and domestic demand left businesses facing more strain in 2019 in a sign of rising risks to the world’s second-largest economy.

The gloomy data points to a further loss of economic momentum as a trade dispute with the United States exerts pressure on China’s vast manufacturing sector and as firms, bracing for a tough year ahead, shelve their investment plans, executives say.

Industrial profits fell 1.8 percent in November from a year earlier to 594.8 billion yuan ($86.33 billion), the National Bureau of Statistics (NBS) said on its website Dec. 27. That marked the first decline since December 2015.

The fall in profits largely reflected slowing growth in sales and producer prices as well as rising costs, He Ping of the statistics bureau said in a statement accompanying the data.

Economists expect earnings to continue to worsen next year, weighed down by smaller gains in industrial prices due to cooling demand, with some even warning of the risk of deflation.

In November, China’s factory price growth slowed to the weakest pace in two years as domestic demand lost further momentum.

“Survival is paramount for us [next year]—we will be more cautious with our investments,” Jiang Ming, chairman of Henan-based Tianming Group, told Reuters. Tianming has businesses in health care, construction, and finance.

“We also need to maintain better cash flows and save our ammunition to prepare for the tight, tough and difficult days ahead,” Jiang said.

China’s economy expanded at the slowest pace last quarter since the global financial crisis, hit by a years-long deleveraging campaign, cooling property market and a trade dispute with the United States, and is expected to cool further next year.

The growing pressure has prompted the government to roll out a range of measures to juice up demand. In a key annual economic conference held this month, the country’s top leaders said they will ratchet up support for the economy in 2019 by cutting taxes and keeping liquidity ample, while promising to push forward trade negotiations with the United States.

At the beginning of this month, U.S. President Donald Trump and his Chinese counterpart Xi Jinping agreed to a 90-day truce, delaying a planned U.S. tariff hike on Jan. 1 as they negotiate a trade deal. Yet there is uncertainty whether they can bridge their differences over a myriad of issues—including trade and intellectual property rights —to reach a durable pact.

Earnings growth at China’s industrial firms has been cooling since April this year as factory price gains slowed on the back growing strains in the global economy. The bitter trade war with the United States has also pressured overall output and demand in a blow to business investment plans.

For the first 11 months of the year, profits at industrial firms rose 11.8 percent from the same period a year earlier to 6.1 trillion yuan, slowing from a 13.6 percent increase in January-October. In the same period, earnings growth at state-owned industrial enterprises also cooled.

Reporting by Stella Qiu, Min Zhang, and Ryan Woo.