China’s Trade-related industries under pressure, but infrastructure-related sectors benefiting from government stimulus efforts to offset trade war with the US

Data also suggested the potential for recovery if US tariffs are rolled back significantly as part of a “phase one” trade deal.

Chinese industrial firms in trade-related industries saw their profits fall sharply in October as a direct consequence of the trade war, Chinese government data revealed when it was released on Wednesday.

However, companies involved in infrastructure construction in some way were seen to be doing quite well thanks to strong government support for such projects in an effort to offset the impact of the trade war with the United States.

The deal to cool the trade tensions between the world’s two largest economies could be close, with one senior US official telling POLITICO on Wednesday that only “millimetres” separated the two sides from reaching an agreement.

How much the tariffs will be rolled back as part of a deal remains unclear, but it is expected, at the very least, to include the postponement of a planned US tariff of 15 per cent on US$156 billion of Chinese imports, including popular electronic products including smart phones and laptops, due to come into effect on December 15.

Wednesday’s data showed that Chinese industrial profits plunged 9.9 per cent in October compared a year earlier, the largest drop since the data was first reported in 2011.

Trade related industries such as chemicals, paper and car parts all posted double-digit profit declines in October, while industries that contribute to infrastructure construction projects, including metals and other mining activity, as well as providers of equipment for railways, ships, as well as other transport equipment, had profits that more than doubled over the last year, ING economists said in a note.

This divergence of profitability among different industries will remain until there are big improvements in the trade negotiations. And we will gauge this on the degree of tariff rollbacks

Other “in-between businesses” that sell mainly to the domestic economy – drinks, sports and entertainment, and pharmaceuticals – showed modest growth, reflecting the slow but steady advance of consumer spending in China, ING added.

“This divergence of profitability among different industries will remain until there are big improvements in the trade negotiations,” ING Greater China economist Iris Pang said. “And we will gauge this on the degree of tariff rollbacks.”

She added: “If there is a major tariff rollback, then exports could recover and the economic and profits picture could change dramatically, but “we remain sceptical about the prospects of any significant progress on tariff rollback.”

Until then, Chinese industries are faced with a series of challenges, including high and rising levels of debt, that are only being made worse by the trade war.

“We are back to the poor corporate situation in 2015 [following the stock market crash that year], but the picture is even gloomier,” said Alicia Garcia-Herrero, chief economist Asia-Pacific at Natixis.

“Corporate revenue is getting worse as leverage continues [to rise] in China and there is less room for government policy to manoeuvre.

“Government policies haven't been working in getting money to private companies, which are increasingly burdened by interest repayments and rising leverage and worsening revenue.

“[State-owned enterprises] and local governments are not investing much either, so it is a different situation from after the [government economic] stimulus in 2016, it is a gloomier picture now.”

Trinh Nguyen, senior economist for emerging Asia at Natixis, warned that China would need to cut interest rates significantly next year to help companies deal with their high debt repayment bills.

The current situation, though, may lead to improvements in China’s industrial upgrading, since weak profits are forcing many companies to make the transformation.