Zero-Covid Policy effects: China’s industrial profits down 3.6%

Profits of China’s major industrial firms contracted further by 3.6 percent on year-on-year basis in the first 11 months of the year, data from the National Bureau of Statistics (NBS) showed Tuesday.

The reason behind this trend during the January-November period was strict Covid-related curbs which disrupted factory activity and supply chains, but analysts foresaw brighter long-term economic prospects after a U-turn in Covid policy.

Despite Beijing ditching some of the world’s toughest anti-virus restrictions in early December, and on Monday announcing it would end quarantine requirements for inbound travellers from Jan 8, the economy is still expected to struggle over the winter months as much of the population becomes infected and unable to work while recovering.

According to the NBS, Industrial profits had slumped to $1.11 trillion, which compares with a 3.0 percent drop for January-October. No standalone data was released for November.

Zhu Hong, a senior NBS statistician, highlighted a rebound in Covid outbreaks and lacklustre demand in November that curbed industrial production and placed increasing pressure on Chinese businesses, according to a statement from the bureau.

Analysts have noted a squeeze in profits both from anti-virus curbs in big manufacturing hubs such as Guangzhou and Zhengzhou, and from the persistent weight of a protracted property crisis and slowing exports.

But they expect a robust recovery could kick in next year as the economy reopens, although for the near term there was likely to be a further slump as the removal of restrictions brings a sharp rise in infections.

Earlier, the World Bank had slashed its growth outlook for China’s economy, as nearly three years of “zero-COVID” curbs and a real estate slump weigh on the world’s second largest economy.

The World Bank had cut China’s expected growth for 2022 to 2.7 percent, down from 4.3 percent in June. China’s projected growth for next year was slashed from 8.1 percent to 4.3 percent.

Last month, industrial output rose only 2.2 percent from a year earlier, missing expectations for a 3.6 percent gain and slowing significantly from the 5 percent growth seen in October.

Industrial profits could fall further in December with many cities facing a surge in COVID infections, said Hao Zhou, chief economist at GTJAI.

He added that strong improvement is highly likely from next January, however, as economic activity returns to normal, and called for robust and targeted policies to help revive private-sector firms in the year ahead.

JP Morgan analysts said China’s domestic reopening, which came earlier and faster than expected, would mean a shorter period of transitional pain in the first quarter of 2023, followed by an above-trend sustained recovery from the second quarter.

Earlier this month, they trimmed their forecast for China’s year-on-year GDP growth rate for the current quarter, to 2.2 percent from 2.7 percent, but raised their full-year growth forecast for next year, to 4.3 percent from 4 percent.

For January-November, profits at private-sector firms shrank 7.9 percent, a slight improvement from the 8.1 percent fall in the first 10 months.

Profits fell for 21 of 41 major industrial sectors, with the ferrous metals smelting and pressing industry suffering the steepest decline, at 94.5 percent. That compares with a 92.7 percent fall for the first 10 months.

Meanwhile, profits for manufacturers were down 13.4 percent in the first 11 months, matching the fall in January-October.

Business confidence in China has fallen to its lowest level since January 2013, a survey showed last week, reflecting the impact of surging Covid cases on economic activity.

At this year’s closed-door Central Economic Work Conference, top leaders and policymakers pledged to step up policy adjustments to support the slowing economy.

China’s economic growth was just 3 percent in the first three quarters of this year and is expected to stay around that rate for the full year, one of its worst years in almost half a century.

Industrial profit data covers large firms with annual revenues above 20 million yuan from their main operations.

LEAVE A REPLY

Please enter your comment!
Please enter your name here