Chinese companies are struggling with both weak demand at home and softening demand in the country's major export markets.

Profits at China's industrial firms fell 20.6% in the first four months of 2023 compared to the year earlier. In April alone, industrial firms posted a 18.2% drop in profit year on year.

Foreign firms saw their profits slide 16.2% in the January to April, while private sector firms recorded a 22.5% plunge.

Of importance because China produces 54% of global steel, ferrous metal smelting & rolling processing industry reported the biggest slump at 99.4% - only a third of the country’s mills are currently operating at a profit.

Chinese steel prices have hit three-year lows on low demand (April 2020 when the Covid-19 pandemic curbed most industrial activity.) This comes at a time when steel mills slow in the summer months (June-August) because of high temperatures and heavy rain. Steel demand is not expected to improve until September.

 Note, 60% of worldwide steel demand goes to property and infrastructure requirements and that’s where the slowing demand can be found. New Chinese construction has slowed 21.2% in January to April.

In fact, Investment in the Chinese property sector, a key pillar of the economy, tumbled 16.2% year on year to April 2023. A sector which was saw prices rising at 10%pa in 2019 is now reflecting losses of 1%. The spectre of Evergrande and its $300 billion of debt and the controversial 3 strike warning imposed on developers has slowed development whilst many buildings remain unfinished. Property acquired ‘off the plan’ as an investment theme is on the nose with wary Chinese investors.  

Could Australia’s iron ore producers be in for a major sales slump and a major stock build up?

But the problems don’t end there.

China is currently suffering from deflation, not inflation

Demographic Problems

There has been a decline in the number of people working in China every year since 2015 - down 3.9% and now accelerating.

China has a major problem with youth unemployment which has skyrocketed to 20.4% in April 2023 compared to just 12% in 2018. With the birth rate down, China is an aging economy.

Definitely not a good sign for an economy which seeks growth at any cost.

Outlook Not Good

Caixin Manufacturing PMI an indicator of what managers think about the immediate future is negative (less than 50%). May is widely expected to be even worse. Put another way, Chinese manufacturing is contracting.

This, combined with weak domestic demand - down 7.9&% in April alone and a weakening in exports. Producing less, buying less, and selling less!  

Whilst the Government target inflation rate in China is 2.5% - year on year it is 0.1% - a direct contrast to what is happening in the rest of the world.

The Producer Price Index (PPI) shows the real ‘profit problem’ for China and its simply this, falling sales prices and rising costs mean significantly less profits.  At a time when raw material costs have increased dramatically, the PPI has fallen 3.6% year on year to April 2023 as they try to remain competitive with the rest of the world.

 If you want corroboration on my article as above, have a look at Joe Bloggs on YouTube. He’s got to be the best economist to simplify macro-economic matters. https://www.youtube.com/watch?v=06kOIut243Ymake