Marc Ostwald, Chief Economist & Global Strategist of ADM ISI discussed China's industrial profits dropping 5.5% in October, attributing the decline to trade tensions with the US and decreased domestic demand. He emphasized the pressure on investment and employment due to shrinking profits in older manufacturing sectors. He suggested improving domestic demand, addressing weakness in consumer confidence, and managing the property sector to support the industrial sector and reinvigorate growth.
00:00Well, let's talk now to Mark Oswald, who's Chief Economist and Global Strategist at ADM Investor Services International.
00:06Good to see you, Mark, as always. Welcome back.
00:08So, industrial profits dropping 5.5% from a year earlier in October, the biggest decline that's been seen since June.
00:16How much have trade tensions with the U.S. been a factor in this?
00:21That's certainly playing a role without any shadow of a doubt.
00:25Well, I've seen it particularly as a lot of smaller manufacturers who export household goods, furniture, those sort of things, toys to the U.S.A.
00:37I think it's also the lack of domestic demand, which is also pressuring it, and the so-called processes of involution,
00:45which the authorities are now basically trying to counter.
00:50And the fundamental problem, obviously, is with profits shrinking above all in the older manufacturing sectors.
01:00It does put pressure on investment, as we've seen in the fixed asset investment numbers, and indeed on employment.
01:07We did see some sectors doing very well, didn't we?
01:10Profits overall at major industrial firms growing at 1.9% in the first 10 months.
01:15What message do these numbers send about where China's next phase of growth will be?
01:22Well, it's certainly going to be in things like anything to do with transport, so shipping, air or rail.
01:30It's also going to be in the auto sector.
01:35So that is becoming more and more subject to price cutting, which hopefully the involution measures, which have been implemented, will counter.
01:45The question now is the bigger challenges, in contrast to 2015, when there were measures basically to boost the manufacturing sector and also to counter overcapacity,
01:58is there's already quite a lot of overcapacity in the high-tech and other similar sectors, which needs to be balanced out.
02:09Yes, there will be growing demand, but at the current stage, particularly with trade tensions with the United States, extra capacity is definitely not needed.
02:21So China's already just made an announcement of an action plan to boost domestic demand.
02:27How can policymakers further support this and also reinvigorate the industrial sector?
02:31I think, you know, improving domestic demand is definitely a key part of it.
02:40The key issue there, though, is the weakness in consumer demand.
02:46You're seeing it also in loan data, consumer loan data, basically weakening at the moment due to a certain lack of confidence.
02:57So it's a tricky phase now because we are in an uncertain world.
03:05There is clearly a big push to promote trade with both Africa and with Asia, and that will definitely help the manufacturing sector without a shadow of a doubt.
03:19But what would be really good is basically to counter the problems in the property sector.
03:25Those really need to now to be ring-fenced so they are not such an enormous drag on GDP as they have been for the past three to four years.
03:36Mark, thank you so much for your expertise.
03:38As always, that's Mark Oswald from ADM Investor Services International.
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