China industrial profits stay resilient as economy leans on factories, exports

[BEIJING] Profits at China’s industrial firms grew more slowly though still at a double-digit pace in May, highlighting a widening divide in an economy leaning on factory output and overseas shipments to counter soft domestic demand.

Economic growth remains fragile, hobbled by a prolonged property downturn and deep structural imbalances that continue to weigh on domestic activity. Meanwhile, companies seeking to escape intensifying competition at home face fresh uncertainty from the protracted Iran conflict.

Profit growth at the country’s industrial firms in May was 21.1 per cent from a year earlier, easing from 24.7 per cent in April, data from the National Bureau of Statistics (NBS) showed on Saturday (Jun 27).

Profits for January-to-May period climbed 18.8 per cent over the corresponding period last year versus an 18.2 per cent increase in the first four months.

“Upstream sectors and the computer industry saw sharp rises, while downstream manufacturing remained under pressure, in line with the producer price index, suggesting that price improvement was the main driver of corporate profit growth,” said Zhaopeng Xing, senior China strategist at ANZ.

Earnings trends have diverged sharply across sectors. Profits of manufacturers of computers, communication and electronic equipment soared 103.9 per cent in January-to-May period – accounting for 43.1 per cent of the growth in profits of all industrial firms – buoyed by a global AI investment boom.

Profit from the non-ferrous metal ore mining and processing sector rose 93.9 per cent.

By contrast, profits at automakers dropped 19.8 per cent despite robust exports, while furniture makers’ profits plunged 58.4 per cent.

Tianchen Xu, senior economist at the Economist ​Intelligence Unit, said the differentiation highlights the importance of a de-escalation of the Iran conflict.

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“As shipping through the Strait of Hormuz resumes and international oil prices fall, we should see a gradual recovery in downstream profits.”

The US military attacked Iran on Friday in response to an Iranian drone strike on a cargo ship in the Strait of Hormuz, with each country accusing the other of violating terms of a ceasefire agreed last week.

Analysts expect Chinese policymakers to step up targeted support to stabilise corporate profitability, particularly as consolidation accelerates in sectors grappling with overcapacity and cut-throat competition.

China’s central bank had instructed some commercial banks to increase their lending this month, people familiar with the matter said on Friday, the latest sign that demand for credit remains weak as the economy grapples with sluggish domestic consumption.

China’s factory-gate inflation accelerated to nearly a four-year high in May, with cost pressures squeezing corporate profit.

Industrial profit figures cover firms with annual revenues of at least 20 million yuan (S$3.8 million) from their main operations. REUTERS