China’s industrial profit growth decelerated last month for the first time since November, signaling persistent economic weakness driven by tepid domestic demand. Despite robust exports and rising prices, these positive tailwinds proved insufficient to counteract the drag from within the country, raising concerns about the broader economic recovery.
According to data released by the National Bureau of Statistics on Saturday, industrial profits increased by 21.1% last month compared to a year earlier. This marks a notable slowdown from the 24.7% jump recorded in April. For the first five months of the year, companies saw their earnings rise by 18.8%, a figure that slightly undershot a Bloomberg Economics forecast of 19%.
The softening in profit gains comes as a surprise to some observers, particularly given several recent positive developments that suggested a more robust economic trajectory. China successfully exited a prolonged period of factory deflation in March, a trend that had persisted for more than three years. Concurrently, producer prices last month rose at their fastest pace since 2022, indicating a potential easing of deflationary pressures at the factory gate.
Furthermore, global investment in artificial intelligence has fueled significant demand for China’s advanced manufactured goods, providing a boost to export-oriented industries. Simultaneously, disruptions in energy markets, exacerbated by the Middle East conflict, have pushed up commodity costs, which can translate into higher revenues for some industrial sectors. However, the latest figures suggest these external and price-driven advantages are not translating into broad-based profit acceleration.
Instead, the renewed weakness in industrial profits underscores that slumping domestic investment and softer household spending continue to weigh heavily on corporate bottom lines. These internal pressures are effectively negating the benefits derived from strong external demand and rising input prices, highlighting a fundamental imbalance within the economy.
The actual strength of the reported profit growth warrants even greater scrutiny, as the headline figures are somewhat inflated by a low comparison base from the previous year. In May of last year, industrial earnings experienced a significant plunge of 9.1%, making the current year-over-year growth appear more robust than it might otherwise be in a normal economic environment.
For the first five months of the year, the total value of industrial profits stood at 3.14 trillion yuan, equivalent to approximately $462 billion. This figure is notably less than what companies earned during the same period in 2022, indicating that despite recent percentage gains, the overall volume of profits has yet to recover to pre-pandemic or even recent-past levels, pointing to a more entrenched challenge in corporate profitability.
Yu Weining, an analyst with the NBS, acknowledged the ongoing difficulties in a separate statement. “The problem of strong supply and weak demand within the country remained outstanding and companies in some industries were still facing difficulties,” Weining stated, emphasizing the persistent imbalance that continues to plague parts of the industrial sector and hinder a more comprehensive recovery.
The latest data suggests that while China’s export engine and certain global trends provide some support, the fundamental challenge of stimulating internal consumption and investment remains a critical hurdle for sustained economic recovery and robust corporate profitability. The dip in profit gains serves as a stark reminder that external strengths alone cannot fully compensate for underlying domestic fragilities.
