China’s industrial profit in July decreased by 1.5% year-on-year, improving from the previous decrease of 4.3%. For the year to date, the decline stands at 1.7%, slightly better than the prior figure of 1.8%.<\/p>\n
The data reflects a context where tariffs continue to exert influence. Additionally, ongoing wholesale level deflation remains a factor impacting these figures.<\/p>\n
The improvement in July’s industrial profit data is welcome, but we see that profits are still down 1.7% for the year. This slight recovery is happening against a backdrop of persistent wholesale deflation, which continues to squeeze margins. The core problem of weak domestic demand hasn’t gone away.<\/p>\n
This aligns with what we saw in the July Producer Price Index (PPI), which officially fell 2.2% year-over-year. Flash manufacturing PMI data for August suggests factory gate prices are still contracting at a similar rate, telling us this deflationary trend is stubbornly persisting. Therefore, any optimism from the profit data should be heavily tempered.<\/p>\n
For traders on indices like the FTSE A50, this suggests a range-bound market is likely in the coming weeks. With profits no longer in a freefall but capped by poor pricing power, selling out-of-the-money options to collect premium seems like a viable strategy. We do not expect a major breakout in either direction before the next round of macro data.<\/p>\n
This cautious outlook extends to industrial commodities, particularly copper and iron ore. We don’t anticipate a demand collapse like the one we feared back in the second quarter of 2025, but upside for futures prices is extremely limited. Any rallies based on government stimulus talk should be viewed as opportunities to sell.<\/p>\n
We are also watching the Australian dollar, which acts as a liquid proxy for China’s industrial sector. After the People’s Bank of China cut the reserve requirement ratio by 25 basis points last week to support the economy, further easing seems likely. This policy divergence will likely put a ceiling on any AUD\/USD strength.<\/p>\n
The key external factor remains the tariff situation, with new trade talks scheduled for mid-September. This event represents a significant risk, making it sensible to hedge any positions. Buying cheap, short-dated volatility on currency pairs like USD\/CNH could be a prudent move to protect against a surprise outcome.<\/p>\n
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