China’s industrial firms experienced a significant decline in annual profits during the first five months of the year, as softening demand squeezed margins, further underscoring the need for additional policy support to revive the country’s post-COVID economic recovery. The 18.8 percent year-on-year slump in profits, coupled with the 20.6 percent contraction from January to April, reflects an economy that is losing momentum across multiple sectors. Weakness in retail sales, exports, property investment, and a high youth jobless rate signal ongoing challenges. Data from the National Bureau of Statistics (NBS) released on Wednesday revealed a 12.6 percent decline in industrial earnings in May alone, following an 18.2 percent drop in April.
The official manufacturing Purchasing Managers’ Index (PMI) marginally increased from 48.8 in May to 49.0 in June, but still remained below the crucial 50-point threshold that separates expansion from contraction. This reading aligns with economists’ forecasts and signifies ongoing stagnation in the manufacturing sector. Additionally, the non-manufacturing PMI fell from 54.50 in May to 53.2 in June, indicating a slowdown in both service sector activity and construction. The NBS’ separate services index also witnessed a decline, dropping to 52.8 in June from 53.8 in May, reaching its lowest point since the relaxation of strict COVID-19 curbs in December.
The persistent slowdown in industrial profits highlights the sustained difficulties faced by businesses in China. Wu Chaoming, Deputy Director of the Chasing International Economic Institute, emphasizes that the struggles faced by corporations further strengthen the case for additional policy measures to support companies. Despite a doubling in year-on-year profit for auto manufacturers in May, the improvement partly reflects the poor performance of the sector last year when COVID-related restrictions significantly impacted businesses. NBS statistician Sun Xiao acknowledged that the external environment is becoming increasingly complicated and severe, and domestic demand remains insufficient to support a robust recovery in industrial profits.
The release of these survey results initially led to a decrease in the value of the yuan to a seven-month low and the Australian dollar to a three-week low. However, both currencies managed to recover their losses later on. Economists had initially anticipated a swift recovery and believed China’s economy would emerge as a primary driver for global growth after the relaxation of COVID-19 restrictions. However, six months down the line, analysts are downgrading their growth forecasts for the remainder of the year. The breakdown of data reveals that foreign firms recorded a 13.6 percent decline in earnings during January to May, while private-sector companies saw a significant slide of 21.3 percent. Out of the 41 major industrial sectors analyzed, profits declined in 24 sectors. The petroleum, coal, and fuel processing industry faced the most substantial slump, reporting a 92.8 percent decline in profits.
The news of declining industrial profits had a mixed impact on Chinese stocks, initially pushing them into the red during the morning session. However, losses were partly mitigated during afternoon trading, leaving the main indexes with mixed results. These developments further emphasize the need for policy support to revive China’s industrial sector and overall economic growth. Policy measures could include targeted initiatives to boost domestic demand, incentivize investment, and support struggling industries. Financial institutions are revising their growth forecasts for China’s Gross Domestic Product (GDP) for the current year. Nomura, among the most bearish, has downgraded its forecast to 5.1 percent from the earlier projection of 5.5 percent, even when considering the prospect of new stimulus measures.
China is expected to release its second-quarter GDP growth data in mid-July. The ongoing decline in industrial profits and weak performance across multiple sectors indicate that the foundation for a revival in industrial profits is not yet solid. Analysts will closely monitor the GDP data to assess the overall health and trajectory of China’s economic recovery.
China’s industrial profits have experienced a double-digit decline in the first five months of the year, driven by softening demand and squeezed margins. The ongoing challenges facing businesses in China highlight the need for additional policy measures to support economic recovery. While certain sectors, such as auto manufacturing, show signs of improvement, the overall recovery remains fragile, primarily due to insufficient domestic demand and a complex external environment. The decline in industrial profits has implications for both foreign and private-sector firms, emphasizing the need for targeted policy initiatives. China’s forthcoming GDP growth data will provide further insights into the state of the economy and the effectiveness of policy measures implemented to bolster industrial profits and overall economic growth.
