^{Photo: South China Morning Post}

China’s Industrial Sector Faces Its Steepest Monthly Setback Since June

China’s industrial economy experienced a significant setback in October as profits at major firms fell 5.5 percent year over year, marking the steepest drop in five months. The decline abruptly ended the double digit gains recorded in August and September and underscored the fragility of China’s recent economic recovery. Despite the October slump, industrial profits for the first ten months of the year still managed a 1.9 percent increase, though this figure slowed noticeably from the 3.2 percent growth seen through September.

Economists link this downturn to a combination of intensifying geopolitical tensions and waning domestic momentum. October was a turbulent month marked by escalating trade disputes with the United States, including warnings from President Donald Trump about potential 100 percent tariffs on Chinese imports. Though Beijing and Washington reached a temporary agreement in South Korea at the end of the month, the uncertainty weighed heavily on business sentiment and export expectations.

Sector Breakdown Shows Deep Divergence Across Industries

The performance across China’s industrial landscape was uneven. The mining industry continued to suffer, with profits plunging 27.8 percent from January to October as commodity prices softened and global demand weakened. In contrast, manufacturers reported a 7.7 percent rise in profit during the same period, while utilities including electricity, water, heat, and fuel suppliers saw earnings grow 9.5 percent.

Automakers demonstrated modest resilience, reporting a 4.4 percent increase in profit for the first ten months of the year, up from 3.4 percent through September. The ownership breakdown of industrial profit growth also revealed interesting shifts. State owned enterprises reported flat earnings, while foreign invested firms including those tied to Hong Kong, Taiwan, and Macau posted a 3.5 percent profit gain. Privately held companies saw a more modest 1.9 percent rise.

Yu Weining, chief statistician at the National Bureau of Statistics, said October’s weakness was partly due to strong performance a year earlier and rapid expansion in corporate spending, both of which weighed on year over year comparisons.

Manufacturing Contracts as Demand Softens

China’s manufacturing sector showed persistent signs of strain. The official manufacturing PMI fell to 49.0, its lowest level in six months and below the 50 point threshold that separates expansion from contraction. This decline reflected cooling global orders, weak domestic consumption, and uncertainty among exporters navigating shifting trade policies.

Consumer demand remained another pressure point. Although China’s consumer price index edged up 0.2 percent year over year in October after months of deflation, economists warned that underlying consumption was still soft. Core inflation rose 1.2 percent, the highest in more than a year, but Nomura’s chief China economist Ting Lu noted that a large share of this increase stemmed from surging gold prices rather than genuine household spending. He further argued that understated declines in rental prices were distorting inflation readings and that China has effectively been in a “moderate recession” since late 2022.

China also escalated its trade restrictions by signaling a ban on all Japanese seafood imports due to diplomatic tensions over Taiwan, adding another layer of complexity to the region’s trade environment.

Growth Momentum Slows as Key Indicators Lose Strength

China’s broader economic slowdown deepened in the third quarter with GDP expanding 4.8 percent, a noticeable deceleration from previous quarters. More recent indicators suggest the weakness is extending into the final stretch of the year. Retail sales rose just 2.9 percent in October, the slowest pace in more than twelve months and the fifth consecutive month of deceleration. Fixed asset investment fell 1.7 percent from January to October, marking the first decline since the pandemic in 2020. Industrial output increased 4.9 percent, missing expectations and pointing to softer production activity.

Unemployment remained elevated as the urban jobless rate held at 5.1 percent. The combination of weaker consumption, slower factory activity, and restrained investment has heightened concerns about China’s ability to maintain stable growth without significant policy intervention.

Policy Outlook: Cautious Support as Beijing Eyes 2025 and Beyond

Chinese leaders have signaled plans to shift toward more consumption driven growth over the next several years, although concrete measures remain limited. Analysts widely expect Beijing to avoid announcing major stimulus packages this year, as the country is still on track to meet its growth target of around 5 percent.

Larry Hu, chief China economist at Macquarie Group, said policymakers are reluctant to either undershoot or exceed this target and anticipate that China could continue expanding at 5 percent in 2026, supported by recovering exports. However, he warned that deflationary forces will continue to weigh on the economy as strong external demand reduces urgency for domestic stimulus.

While external trade agreements may offer short term relief, weak household spending, declining investment, and long running structural challenges mean China’s industrial sector faces an uphill path to restoring stable profit growth.