China Industrial Profit Growth Slows in June
· news
China’s Profit Rebound Hits Speed Bump as Energy Prices Flatten Out
China’s industrial profit growth, which had been rising steadily for months, slowed to 15.1% year-on-year in June, marking a second consecutive month of deceleration. The National Bureau of Statistics released figures showing that profits declined from May’s pace.
The slowdown is significant because it suggests China’s economy may be losing steam. It also highlights the fragile nature of its industrial sector’s recovery. For much of this year, Chinese manufacturers benefited from a combination of factors: a rebound in global demand and an end to factory-gate deflation. However, these tailwinds are starting to fade.
Producer prices dipped 0.3% month-on-month in June, marking the first decline since July last year, according to LSEG data. Factory-gate prices rose 3.6% year-on-year in the second quarter, but this gain is largely attributed to high global energy costs.
The Wobbly Reflation Boost
China’s policymakers face a stark reminder of their challenges: domestic demand remains sluggish, and the reflation boost that had been driving profits higher appears precarious at best. Economists are bracing themselves for a cautious approach from the Communist Party’s Politburo meeting later this month.
Robin Xing, chief China economist at Morgan Stanley, expects policy support to be “mildly more urgent,” meaning a gradual increase in fiscal spending rather than a major stimulus package. While exports continue to drive growth, domestic demand remains a concern, and Beijing is hesitant to take bold action given its focus on curbing excess factory capacity.
The Impact of the Asian Industrial Capex Super-Cycle
One question that lingers is the extent to which China’s industrial sector will be affected by the broader Asian industrial capex super-cycle. Xing points to the AI-driven investment cycle, in which China is a key hardware supplier, as a driver of growth – but this dynamic also raises concerns about the sector’s vulnerability to external shocks.
As Beijing navigates its economic challenges, the stakes are high: a slowing economy risks exacerbating domestic social and economic tensions, while a faltering industrial sector could have far-reaching implications for global supply chains. A more nuanced policy response is needed – one that balances support for growth with the need to address structural issues.
In the coming weeks and months, investors will be watching closely as China’s policymakers grapple with these challenges. The question on everyone’s mind: can they strike the right balance between supporting growth and addressing the underlying weaknesses in China’s industrial sector?
Reader Views
- CMColumnist M. Reid · opinion columnist
China's industrial sector is teetering on the edge of a hard landing, and policymakers would be wise to take heed. The slowdown in profit growth isn't just a blip – it's a warning sign that China's economy is losing steam. While exports remain robust, domestic demand remains stubbornly sluggish, and Beijing's reluctance to intervene could exacerbate the problem. What's more, China's industrial sector is not insulated from global trends: as energy prices soften, factory-gate deflation could resurface, jeopardizing profits and growth.
- ADAnalyst D. Park · policy analyst
The slowdown in China's industrial profit growth is less about a hard landing and more about a waning reflation boost. Policymakers would do well to focus on structural reforms rather than propping up an economy with increasingly ineffective stimulus packages. The lingering impact of the Asian Industrial Capex Super-Cycle, which peaked in 2017, still casts a shadow over China's industrial sector, and policymakers are overdue for a thoughtful reassessment of their strategy to tackle excess capacity and boost domestic demand.
- RJReporter J. Avery · staff reporter
The slowdown in China's industrial profit growth is a red flag for policymakers. While exports remain strong, domestic demand remains sluggish, and the reflation boost that fueled profits higher appears precarious. But what about the Asian Industrial Capex Super-Cycle? Its impact on China's economy can't be overstated. A decline in capex would have far-reaching consequences, particularly for regions like Shandong and Jiangsu, which are heavily reliant on industrial production. Will Beijing take decisive action to mitigate this risk, or will it rely on more cautious policy tweaks? The clock is ticking as the Politburo meeting approaches.