China's industrial profits surge 21.6% in September, biggest jump in nearly two years

China's industrial profits surged 21.6% year-on-year in September, marking the largest gain since November 2023 and extending a strong rebound, primarily driven by Beijing's policies to curb price competition and robust performance in high-tech manufacturing. While overall profits for the first nine months accelerated to 3.2%, this occurred amidst persistent producer price deflation, slowing Q3 GDP growth, and contracting fixed-asset investment. Analysts suggest that despite these mixed economic signals, the resilient industrial output may lead Beijing to prioritize industrial upgrades and technological breakthroughs over broad consumption stimulus, indicating a targeted policy direction for future economic development.

Analysis

China's industrial profits demonstrated a significant rebound, surging 21.6% year-on-year in September, marking the largest gain since November 2023 and extending August's 20.4% increase. This acceleration contributed to a 3.2% profit growth for major industrial firms in the first nine months, primarily driven by Beijing's policies aimed at curbing price competition and robust performance in high-tech manufacturing, which saw earnings jump 26.8% in September. Foreign industrial firms and private companies also showed strong profit gains of 4.9% and 5.1% respectively, contrasting with a 0.3% dip for state-owned enterprises.

Despite these strong profit figures, the broader economic landscape presents mixed signals, with producer prices slumping 2.3% in September, extending a third year of deflation. China's Q3 GDP growth slowed to 4.8%, the weakest in a year, and fixed-asset investment contracted 0.5% in the first nine months, marking the first decline since 2020. These challenges are compounded by persistent trade tensions, a prolonged housing downturn, and weak consumer confidence.

Policymakers appear to be prioritizing industrial upgrading and technological breakthroughs, with less emphasis on broad consumption stimulus, despite weak household sentiment. The resilient industrial output in September, climbing 6.5%, suggests Beijing may not see urgency for large-scale stimulus to meet its growth target. This indicates a strategic shift towards supply-side improvements rather than demand-side stimulation.

While manufacturing profits grew 9.9% and electricity, heat, fuel, and water supply climbed 10.3% in the Jan-Sep period, the mining sector experienced a significant 29.3% profit drop. This sectoral divergence highlights the uneven impact of current economic conditions and policy interventions across different industries.

Key Decisions for Investors

• Investors should consider increasing exposure to high-tech manufacturing and private industrial firms, given their strong profit growth and alignment with China's strategic priorities.
• Monitor policy signals for further clarity on industrial upgrading versus consumption stimulus, as Beijing's targeted approach may limit broad economic support.
• Assess the ongoing impact of producer price deflation on corporate margins and demand, especially for sectors not directly benefiting from government interventions.
• Given mixed economic signals and sectoral divergence, a selective investment strategy favoring resilient industrial segments and companies less exposed to housing and consumer headwinds is advisable.