October Industrial Enterprise Profits: New Changes Amid a Shift to Negative Growth

Industrial enterprises’ profits have bid farewell to two months of high growth, returning to the negative growth range—what signals does this send? Unlike the previous two consecutive months when profit growth exceeded 20% year-on-year, in October, the growth rate of industrial enterprises’ profits turned negative, dropping to -5.5%. Apart from the impact of a higher profit base, October’s enterprise profit data seems to reflect another key phenomenon: “anti-involution” has quietly entered a new stage, with the core task shifting from initial correction to the optimization of the supply system. At this critical juncture, further policies to promote “anti-involution” are essential. Specifically: Is this a base effect? Yes, but not entirely. Compared with the previous two months, as the profit base of industrial enterprises rose significantly in October, a slowdown in growth rate was highly probable. However, if the two-year average compound growth rate is used to remove the base effect, the profit growth rate of industrial enterprises still shows a downward trend, falling from -5.8% in September to -7.8% in October. This indicates that apart from the base disturbance, there are other reasons for the decline in profit growth. The biggest reason may still be due to “anti-involution.” Looking at it through the three-factor framework (volume, price, and profit margin), October was characterized by “volume up, price down, and negative profit margin growth,” which differs from previous situations in two clear ways: First, under “anti-involution,” the rebound in “price” is still not strong enough, and the supportive effect of “volume” on profit growth is notably weakening. Although this may lead to a short-term contraction in “volume,” it is crucial for optimizing the medium- and long-term production structure. Second, revenue profit margins have shifted from being a driver to a drag. Apart from the same base reasons, rising costs and expenses have become another major factor—unlike the trend since July, when the proportion of costs and expenses to revenue continued to decline, in October, costs and expenses actually rose. We believe that the initial drop in costs resulted from correcting distorted market behaviors and eliminating the huge waste of “involution,” which brought short-term gains; while the current rise in costs is an inevitable path toward high-quality economic development, reflecting the “real cost” and “innovation cost” that enterprises pay in a virtuous cycle of production and development. During this process, profits for midstream industries performed “slightly better.” In October, the profit growth rates for upstream, midstream, and downstream industries were -12.0%, -4.8%, and -13.9%, respectively (compared to 5.0%, 21.8%, and 10.0% in September). Overall, midstream profits performed “slightly better.” As “anti-involution” policies progress, profits are increasingly determined by pricing power and technological barriers. Leading enterprises in midstream manufacturing and some technology-driven downstream firms may emerge victorious, while upstream companies that rely solely on resources and downstream firms lacking bargaining power will face pressure. Focusing on specific industries also sends a strong signal that “anti-involution” has entered a new stage. Combining our previously proposed “anti-involution” four-quadrant framework, although many industries remained in the third quadrant (“shrinking volume and price”) in October, more industries are quietly shifting from “shrinking price” to “rising price.” If this “key leap” can be achieved in the future, it will represent a crucial success for “anti-involution” and drive significant improvement in industrial enterprises’ profit growth. The effort to move toward “rising prices” needs to be strengthened, requiring unwavering “anti-involution” policies. Whether costs and expenses gradually return to the “non-involuted” normal range, or PPI growth shows slight improvement, all indicate that “anti-involution” policies have made preliminary achievements. This also means these policies need to be further implemented and consolidated, and if necessary, timely support from demand-side policies will be indispensable. Source: Chuan Yue Global Macro Risk Disclaimer and Terms The market carries risk, and investments should be made carefully. This article does not constitute personal investment advice, nor does it consider the unique investment objectives, financial situation, or needs of any individual user. Users should consider whether any opinions, views, or conclusions herein suit their specific circumstances. If you invest based on this content, you do so at your own risk.