Entrenched PPI deflation took a toll on profits for industrial enterprises in China last month, data out Wednesday showed.
In fact, industrial company profits plunged 9.9% on year last month to 427.6b yuan, the NBS said.
That marks the steepest slide on record (or at least going back to 2011) and comes on the heels of September’s 5.3% decline. It was the third consecutive drop.
Factory gate prices first slid into deflation over the summer, and the problem has persisted since.
In addition to being a drag on the outlook for global inflation (and thus working at cross purposes with central banks’ efforts to reflate), it’s extremely vexing for industrial companies, which are contending with lackluster demand on the home front, as exhibited in falling retail sales, contracting imports, diminished appetite for credit and the worst auto slump on record.
Factory prices dropped 1.6% in October, more than expected, even as surging pork prices pushed the CPI up to the highest level in seven years.
That juxtaposition effectively forces the PBoC to choose between deploying monetary stimulus to bolster economic activity at the risk of exacerbating the pain for consumers, or sitting idly by as the economy decelerates further.
If factory gate prices continue to decline and demand doesn’t pick up, the profit squeeze will likely continue.
The PBoC delivered a series of token rate cuts this month as part of an ongoing effort to administer a slow drip of monetary accommodation aimed at keeping things some semblance of stable as the trade talks move forward.
So far, Beijing has resisted pressure to engage in the kind of large-scale, “kitchen sink” stimulus that’s saved the economy – and the global cycle, if we’re all being honest – in the past.
That recalcitrance may become untenable next year, although, as Donald Trump has learned over the past 18 months, China is quite adept at playing the long game, even if it means enduring some pain the short-term.