The Reality of China’s Industrial Profits

The Reality of China’s Industrial Profits

China's industrial profits have taken a hit in March, with slower gains for the quarter compared to the initial two months of the year. Official data from the National Bureau of Statistics (NBS) revealed that cumulative profits of China's industrial firms only rose by 4.3% to 1.5 trillion yuan ($207.0 billion) in the first quarter compared to the same period last year. This marks a significant slowdown from the 10.2% increase in profits during the first two months of the year. Moreover, profits fell by 3.5% year-on-year in March, indicating a concerning trend for the world's second-largest economy.

The industrial sector's recovery appears to be uneven, with the high-tech manufacturing leading the growth with a 29.1% rise in profits in the first quarter. However, the NBS noted that the recovery of firms' profits was inconsistent across different sectors. For instance, profits in the automobile manufacturing industry grew by 32.0% in January-March. This disparity in performance highlights the challenges faced by different industries in the current economic landscape.

China's largest auto show recently showcased the latest electric vehicles (EVs), underscoring the country's shift towards an all-electric state of mind. However, even in this burgeoning market segment, challenges remain. For instance, Chinese electric vehicle battery company CATL saw its swing back to growth in the first quarter, but its declined for the second consecutive quarter due to slowing demand and intensified competition. These challenges reflect the broader economic uncertainties facing China as it transitions to new growth models.

Amidst these challenges, experts like Bruce Pang, Chief Economist and Head of Research in Greater China at JLL, have highlighted the need for policy interventions to stimulate demand in the industrial sector. Pang emphasized that future policies should focus on the demand side rather than the supply side to ensure sustainable growth. With Fitch recently cutting its outlook on China's sovereign credit rating to negative, citing risks to public finances, the urgency of implementing effective policies to support industrial becomes even more apparent.

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As China's industrial profit numbers cover firms with annual revenue of at least 20 million yuan ($2.76 million) from their main operations, the performance of these companies will have a significant impact on the overall economic health of the country. While profits took a major hit last year in the wake of COVID-19, the current challenges facing the industrial sector signal a bumpy road ahead. Moving forward, policymakers will need to address the underlying issues affecting industrial profitability to ensure a sustainable and robust recovery for China's economy.

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Economy

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