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China’s industrial profits registered its first drop in nearly three years in November, with businesses preparing for a tough year ahead due to declining external and domestic demand.

The National Bureau of Statistics (NBS) reported on Thursday that earnings at the country’s industrial firms was down 1.8 percent in November from the previous year to CN¥594.8 billion ($86.33 billion), marking its first profit fall since December 2015.

The fall in profits largely reflected slowing growth in sales and producer prices as well as rising costs, said He Ping of the statistics bureau.

Earnings growth at China’s industrial businesses has been cooling since April 2018 as factory price gains turned sluggish on the back of rising risks in the global economy. The trade war with the US has also strained overall productivity and demand in a blow to corporate investment plans.

For the first eleven months, profits at industrial companies were up 11.8 percent from the same period in 2017 to CN¥6.1 trillion, losing momentum from a 13.6 percent increase in January-October. Earnings growth at state-owned industrial firms also cooled in the same period.    

The weakness does not stop there. Economists expect earnings to tumble further next year due to smaller gains in industrial costs as a result of slackening demand, with some even warning of the risk of deflation.

Shanghai-based analyst Nie Wen stated that soft economic indicators such as producer prices, industrial output and orders all point to further pressure on corporate profitability, adding that firms’ revenues have been hit by shrinking demand.

Industrial profits next year might very well post a 5-10 percent decline on average, said Wen.

China’s factory price in November also grew to its weakest pace in two years as domestic demand lost more momentum.

Pressure Piles on China’s Economy

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The disappointing data reinforces signs of slowing economic growth as the trade conflict with the US adds more weight on China’s vast manufacturing industry and as companies, which are getting ready to face further strain in 2019, put their investment plans on hold.

Jiang Ming, chairman of a Henan-based company that has business in healthcare, construction, and finance, stated that survival is paramount for them next year and that they will be more cautious with their investments.

Miang added that they also need to maintain better cashflows and save their ammunition to prepare for the tight, tough, and difficult days ahead.

The world’s second largest economy grew at the slowest pace last quarter since the global financial crisis, weighed down years-long deleveraging campaign, cooling property market, and a trade spat with the US.

China’s economy is expected to slow further next year.

With pressure increasing, the Chinese government has launched a range of measures to boost demand. The country’s top leaders has pledged to ratchet up support for the economy in 2019 by lowering taxes and maintaining sufficient liquidity, while vowing to move forward with trade talks with the US.

US President Donald Trump and Chinese President Xi Jinping had agreed to a 90-day truce at the start of the month, putting a planned US tariff hike on pause until January 1 as they negotiate a trade deal.

However, there is uncertainty whether the two superpowers can settle their differences over several issues – including trade and intellectual property rights – to establish a firm agreement.

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