China's industrial profits expand for second month in September

China's industrial profits increased for a second consecutive month in September by 21.6%, the fastest pace since November 2023, following a 20.4% rise in August, leading to a 3.2% gain for the first nine months of the year. This rebound, driven by high-tech and equipment manufacturing, offers officials optimism about an economic turnaround despite a Q3 slowdown and ongoing trade uncertainties. However, economists caution that these recent surges are partly attributable to a low base of comparison, and weak domestic demand continues to strain businesses, suggesting a nuanced outlook for corporate earnings.

Analysis

China's industrial profits showed a significant rebound, with a 21.6% increase in September, marking the fastest pace since November 2023, following a 20.4% jump in August. This consecutive monthly growth contributed to a 3.2% year-to-date profit increase for the first nine months, up from 0.9% in the January-August period, primarily driven by high-tech and equipment manufacturing sectors. This data has fostered official optimism regarding economic stabilization.

However, this positive trend is tempered by underlying economic fragilities, as the broader economy slowed to its weakest pace in a year during Q3, with fragile domestic demand largely offset by robust exports. Nomura economists caution that the recent profit surges are partly attributable to a low base of comparison, suggesting a nuanced view on the genuine recovery of corporate earnings.

Weak domestic demand continues to strain businesses reliant on discretionary spending, exemplified by Zhangzhou Pientzehuang Pharmaceutical Co.'s 28.8% Q3 net profit drop. While private-sector and foreign firms recorded profit increases of 5.1% and 4.9% respectively, state-owned firms experienced a 0.3% profit slide in the first nine months, indicating uneven recovery across ownership types. China's leadership, while aiming to expand domestic consumer demand, continues to prioritize manufacturing and technological self-reliance.

Key Decisions for Investors

• Investors should critically assess the sustainability of China's industrial profit recovery, acknowledging the 'low base of comparison' effect and persistent weak domestic demand, which may mask underlying economic challenges.
• Consider overweighting exposure to high-tech and equipment manufacturing sectors, which are benefiting from policy support, while maintaining a cautious stance on companies heavily exposed to discretionary consumer spending.
• Monitor the execution of China's dual policy objectives—expanding domestic demand versus prioritizing manufacturing self-reliance—as this will significantly influence sector performance and investment opportunities.