Fears of a slowdown in China were renewed this week as the latest economic data highlighted further contraction. Industrial profits slowed to 3.6% YoY in October, down from 4.1% over the prior month.
Year to date growth now stands at 13.6% in October, marking a decline from the 14.7% YoY figure registered in September – a sharp profit squeeze for Chinese manufacturers.
Weaker Commodity Prices Weighing
The decline in profits can be explained through the weakness seen recently in commodity prices. Ferrous metals and crude oil have both been trading lower over the last two months, reducing profits for mining companies and energy drillers. Furthermore, expectations for weaker commodity prices are linked to ongoing trade war uncertainty.
However, there are some positive signs. Profits from manufacturing consumer goods remained resilient last month with textiles and garments, food production, computers, telecommunication, and other electronics among 13 components which saw profit growth.
Growth in these areas is likely linked to lower prices for raw materials and energy as well as steady demand for consumer goods from domestic and foreign economies.
OECD Forecasts 30 Year Lows In Chinese Growth
However, the outlook is not great for the domestic economy. The prospect of higher US tariffs beginning January as well as the threat of a further wave of tariffs is weighing on activity.
Chinese consumer confidence has fallen, and GDP continues to fall with the OECD forecasting Chinese GDP to plummet to 30-year lows of 6% over the next two years. Unless we see a significant improvement in the trade situation between China and the US, we are likely to see further contraction in leading economic indicators.
USDCNH is now once again testing the bearish trend line from 2016 highs. Above here the key level is the all-time high at 6.9903 ahead of the major 7 psychological level. To the downside, support comes in at the 6.8514 level and below there the 6.7838 level.