China’s Industrial Demand Continues to Outpace Supply in June, Easing Financial-System Risk: Morgan Stanley
China’s industrial demand growth remained significantly faster than supply growth in June, while overcapacity improved for the ninth consecutive month.
China’s industrial demand growth remained significantly faster than supply growth in June, while overcapacity improved for the ninth consecutive month. Manufacturing profits rose a strong 20.1% year over year, while growth in medium- and long-term industrial loans slowed, supporting financial-system risk reduction.
Policy efforts to curb “involution,” together with strong exports, are further reducing risks to the financial system. Profitability across industries is showing a healthy degree of differentiation. A more rational pace of manufacturing growth is more sustainable than demand stimulus, supporting the absorption of industrial credit risk and financial-system stability.
In one sentence: The pattern of industrial demand growing faster than supply continues to solidify in China. Overcapacity has improved for nine consecutive months, and strong manufacturing-profit growth is creating favorable conditions for the financial system to work through risk.
Potential beneficiaries include banks, as lower industrial-credit risk could improve nonperforming-loan ratios, and leading manufacturers, as strong profit growth could increase industry concentration. The market already appears to have priced in some expectations for financial-risk resolution, but the extent to which improving industrial profits will flow through to banks’ asset quality may not yet be fully reflected in valuations.
Key catalysts are the sustainability of industrial-profit growth and capacity utilization in the second half of the year; changes in banks’ nonperforming-loan ratios and provision-coverage ratios; the effectiveness of anti-involution policy implementation and progress in industry consolidation; and changes in manufacturing-investment growth.
Policy efforts to curb “involution,” together with strong exports, are further reducing risks to the financial system. Profitability across industries is showing a healthy degree of differentiation. A more rational pace of manufacturing growth is more sustainable than demand stimulus, supporting the absorption of industrial credit risk and financial-system stability.
In one sentence: The pattern of industrial demand growing faster than supply continues to solidify in China. Overcapacity has improved for nine consecutive months, and strong manufacturing-profit growth is creating favorable conditions for the financial system to work through risk.
Potential beneficiaries include banks, as lower industrial-credit risk could improve nonperforming-loan ratios, and leading manufacturers, as strong profit growth could increase industry concentration. The market already appears to have priced in some expectations for financial-risk resolution, but the extent to which improving industrial profits will flow through to banks’ asset quality may not yet be fully reflected in valuations.
Key catalysts are the sustainability of industrial-profit growth and capacity utilization in the second half of the year; changes in banks’ nonperforming-loan ratios and provision-coverage ratios; the effectiveness of anti-involution policy implementation and progress in industry consolidation; and changes in manufacturing-investment growth.