China: Yet to Bottom
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The Chinese corporate profit cycle is worsening, which together with risk aversion in the household sector, signal the economy is yet to bottom.
Manufacturing is struggling
In business cycle analysis framework the profit cycle is the single most important business cycle indicator. Profits are the core driver of economic activity. It underpins investment decisions, drives innovation and the fluctuations in economic activity. The profit cycle is the leading indicator of the business cycle and marks the tipping points. Moreover in a downturn the stabilisation of the profit cycle precedes the bottoming of the economy. The Chinese corporate profit cycle downswing deepened through the first three quarters of 2024 (Figure 1).
Figure 1: China profit cycle

Source: Bloomberg & Westbourne Research
A deep dive into industry sector data from the China National Bureau of Statistics indicates that the corporate sector is struggling.
In the first 11 months of the year the number of loss-making manufacturing companies rose 11% compared with the same period in 2023, and accounted for over 25% of the manufacturing sector, up from 24% in 2023. Loss making firms are rising across most sectors. Figure 2 shows the sectors where the numbers have risen the fastest. The private sector has been hard hit. The number of loss-making industrial companies have been increasing in the private sector since June, up 12.9% YoY compared with 8.7% YoY for state owned, that have been under pressure since August.
Figure 2: Sectors with the biggest increase in loss making firms

Source: Haver Analytics & Westbourne Research
The upshot is manufacturing sector profits in the current year to November 2024 were down almost 5% and fell in half of the 34 industrial sectors covered. The fuel & coal processing, non-metal mineral products, non-ferrous metals smelting and automobile industries saw the largest declines in profitability.
Figure 3 through Figure 6 capture the challenges faced by companies across sectors.
Let’s start with the good news (Figure 3). Some key industries saw large operating revenue improvements in the first eleven months of 2024 and manufacturing revenues in aggregate were up 2.8% YoY. Only five of the 34 industrial sectors experienced year-on-year declines.
Figure 3: Change in operating revenues by sector

Source: Haver Analytics & Westbourne Research
Operating costs though are rising more quickly than operating revenues, which together with weak consumer pricing power, is squeezing profit margins and accounts for the weakness of profits. Manufacturer’s operating costs rose by 3.2% YoY between January and November last year. Figure 4 illustrates the sectoral differences, highlighting the sectors under greatest pressure and the few where costs decreased.
Figure 4: Largest change in operating costs by sector

Source: Haver Analytics & Westbourne Research
Another concern is that, despite strong exports in 2024, inventories are rising, adding to costs. Figure 5 show the biggest increases in involuntary stock build by sector. With the exceptions of the food and fuel & coal processing sectors, in every other sector inventories increased and were up 3.6% YoY for the manufacturing sector as a whole.
Figure 5: Sectors with the biggest increase in inventories

Source: Haver Analytics & Westbourne Research
High debt remains a persistent and worsening issue as liabilities continue to rise (Figure 6). Corporate debt paydown—a typical feature of downturns and a crucial step toward strengthening balance sheets for the next recovery—is not occurring on an industry-wide scale. Liabilities are increasing across all sectors, bar tobacco and food processing. Manufacturing sector alone, liabilities in aggregate grew by 6.6% YoY in the first 11 months of 2024.
Figure 6: Sectors with the largest increase in liabilities

Source: Haver Analytics & Westbourne Research
Corporate debt rising, private credit growth slowing
Schumpeter’s forces of creative destruction are yet the to hit the shores of China. The corporate debt overhang is growing rather than being addressed through restructuring, consolidation and by weeding out weak companies. By 3Q24 end, corporate debt had surged to 174% of GDP (Figure 7). Combined with persistent overcapacity, this creates a significant drag on economic growth.
Figure 7: Debt as a share of GDP trends

Source: Haver Analytics & Westbourne Research
Private credit growth is slowing even as interest rates fall (Figure 8). The deceleration in corporate credit growth is a positive and reflects healthy caution on the part of banks. The weakness of household credit growth stems from a lack of demand. This trend in private credit growth serves as yet another sign that the economy is not undergoing a sustainable recovery. It also highlights a deeper and more challenging issue—risk aversion.
Figure 8: Domestic credit growth

Source: Haver Analytics & Westbourne Research
Risk aversion is pervasive
Risk appetite is pro-cyclical. However, in China’s case risk aversion has become entrenched and explains why counter cyclical monetary and fiscal policy easing are not working. Risk aversion in the household sector stems directly from the housing market downturn.
Households & the property market
The current housing market downturn can be traced back to the 2020 introduction of the "Three Red Lines" policy. This policy, which restricted property developers' borrowing, triggered a liquidity crisis for highly leveraged firms such as Evergrande and Country Garden. That marked the beginning of what has since become a full-blown property market crisis. Existing home prices have now fallen for 31 consecutive months.
The government and the PBOC have thrown the whole kitchen sink of policy measures to bring the downturn to an end. Right from identifying White Lists of incomplete developer projects to fund, cutting interest rates, restructuring mortgage loans, easing mortgage lending rules including downpayment ratios, removing restrictions on number of properties an individual can own to introducing tax incentives for home and land transactions.
Figure 9 shows existing and new home prices, measured on a year-on-year basis, are falling more slowly. However, while the pace of contraction may be slowing, the reality is that both existing and new home prices continue to decline in absolute terms, meaning property values are depreciating year after year.
Figure 9: Existing and new home prices

Source: Haver Analytics & Westbourne Research
The housing market downturn is the root cause of risk aversion in the household sector — and understandably so. For most homeowners, property represents the largest asset on their balance sheet. With a homeownership rate of 90% (compared to 65% in the U.S.) and a significant portion of Chinese households owning multiple properties — over 20% in urban areas and 16% in rural regions — the challenges posed by the property downturn are amplified and is a huge dampener for consumption spending.
Fiscal policy is being eased to support spending. In the latest fiscal stimulus chapter the government expanded its home appliance trade-in scheme from 8 to 12 categories - including refrigerators, washing machines, televisions, air conditioners, and computers. Buyers can receive subsidies of 15% to 20 % of the product price and are eligible for one subsidy per product category, with a maximum subsidy of CNY2,000 (USD273) per item. Automotive subsidies have been extended to include the scrapping of vehicles under older emission-standard. Buyers of electric vehicles can get up to 15,000 yuan in subsidies, while those buying traditional fuel vehicles may receive up to 13,000 yuan.
Don’t be fooled. This is just fiscal policy tinkering at the margin. Until property prices rise consistently, the lack of risk appetite will continue to suppress household spending and broader economic activity. It is not enough for property prices to stop falling to restore confidence.
Whether current market measures are really working and have put a bottom under the market is unclear at this stage. Regardless, it is not going to be a quick turnaround. Household risk aversion will persist through 2025 and beyond, poses a structural impediment to China’s economic recovery.
Sharmila Whelan
AuthorMore in Author Profile »The founder of Westbourne Research (www.westbourne-research.com), Sharmila Whelan is a seasoned Global Geopolitical-Macro Strategist with nearly three decades of experience advising buy-side clients on multi-asset investment strategies and asset allocations. Her career has been defined by her differentiated thinking, a deep understanding of the intricate connections between global geopolitics, macro and policy dynamics, and the Austrian business cycle approach to economic analysis. She has counseled governmental bodies such as the CIA, the US State Department, the British High Commission, DFID, and China’s NDRC.
Sharmila has held prominent roles in both London and Hong Kong, serving as Managing Director at Aletheia Capital, Director at Merrill Lynch Bank of America, Senior Economist at CLSA, and Asia Regional Economist at BP Plc. In 2022, Bloomberg recognised her as one of the UK's "12 New Expert Voices." She is a frequent media commentator on Bloomberg TV and radio, BBC World Business News, and CNBC, and is a sought-after speaker at high-profile events such as the Financial Times Wealth Summit and CFA UK & India conferences. Sharmila also contributes opinion pieces to Financial Times Professional Wealth Management and the Economist Group’s EIU.