China Industrial Profits Fall 1.7% in July Beating Estimates; Hang Seng Index Dips

China Industrial Sector Woes Linger Amid Policy Adjustments

China’s industrial sector faced increased scrutiny as investors continued to gauge the impact of US tariffs on the economy.

Industrial profits declined 1.7% (January – July) year-on-year after falling 1.8% (year-to-date) year-on-year in June. Economists had expected a 1.8% drop.

Margins Under Strain

Despite the marginally milder fall in profits, industrial sector conditions remain bleak. Weakening external demand has intensified competition for new business, leading to price wars. Rising input prices and lower output prices to win bids have affected company profit margins.

PMI Data Highlights Weakness

July’s closely watched S&P Global China General Manufacturing PMI fell from 50.4 in June to 49.5 in July, dropping below the neutral 50 level. The July survey highlighted key trends, including:

• New export orders contracted for the fourth month in a row.
• Higher raw material costs drove average input prices higher.
• Firms reduced their selling prices amid increasing competition.

Notably, falling external demand and narrowing profit margins led to manufacturers cutting staffing levels to manage costs. A continued strain on profit margins could impact the labor market further, potentially undermining Beijing’s efforts to boost domestic consumption.

Labor Market Challenges

China’s unemployment rate increased from 5% in June to 5.2% in July, while youth unemployment soared from 14.5% in June to 17.8% in July. A record number of graduates entered the labor market in July, pressuring Beijing to roll out policy measures aimed at boosting job creation.

Beijing’s Policy Response

Last week, Beijing responded to signals of a loss of economic momentum at the start of the third quarter. China’s Premier Li Qiang vowed to boost spending, stabilize the housing market, and tackle labor market strains.

Economists expect Beijing to roll out stimulus measures over the remainder of the year to achieve the 5% GDP growth target for 2025.

Outlook from Economists

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero recently commented:

“China can reach its 2025 growth target but with even more stimulus and the second half will be tougher. All in all, while the Chinese economy has a greater likelihood of meeting the government’s growth target, there are significant uncertainties down the road. Despite foreseeable headwinds from trade friction and persisting deflation, the government does have more bullets for further stimulus if needed.”

Market Outlook: Trade Talks and Data Watch

While recent economic indicators have pointed to a loss of momentum, trade developments and upcoming private sector PMI numbers on August 31 may ultimately drive sentiment.

On Tuesday, August 26, reports surfaced of China’s trade negotiator, Li Chenggang, planning to visit Washington to resume trade talks. Progress toward a US-China trade deal, reducing US tariffs on China, could boost external demand and ease price pressures, potentially raising industrial profits.

August’s NBS Manufacturing PMI number will indicate whether the manufacturing sector contracted more sharply. Economists expect the NBS Manufacturing PMI to increase from 49.3 in July to 49.7 in August. An increase above the neutral 50 level may ease concerns about China’s economic outlook. On the other hand, a lower reading may push Beijing into rolling out meaningful measures to bolster the economy.

Markets React to Softer Drop in Industrial Profits

The Hang Seng Index reacted to the July data, briefly climbing to a high of 25,653 before falling to a low of 25,565. At the time of writing, the Hang Seng Index was up 0.26% to 25,592. Meanwhile, Mainland China’s CSI 300 and the Shanghai Composite Index were down 0.05% and 0.18%, respectively.

Despite the softer fall in industrial profits, uncertainties remain over the effectiveness of Beijing’s stimulus measures and upcoming trade talks.

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