China Industrial Profit Growth Slows Amidst Economic Downturn

In July, China experienced its weakest industrial profits growth for the year, with an increase of 11.2% compared to the previous year, according to data released by the National Bureau of Statistics on Thursday.

For the first seven months of the year, profits rose by 17.6% year-on-year, a decline in momentum from the 18.7% growth recorded in the first half of the year. This data encompasses companies with core business revenues exceeding 20 million yuan ($2.9 million) annually.

Industrial corporate profitability has shown a significant recovery, moving from several years of decline since 2021 and minimal positive growth last year to double-digit gains this year. This turnaround was largely attributed to the global boom in artificial intelligence, which boosted demand for computing and electronics manufacturing.

However, the boost from rising producer prices appears to be diminishing. While factory-gate inflation in China had reached its fastest pace in nearly four years in June, driven by surging global energy costs, domestic demand has lagged. This trend was evident as producer price inflation slowed to a three-month low of 3.5% in July.

Furthermore, the overall growth of the world's second-largest economy also softened in the second quarter, reaching its slowest pace in over three years.

Economists anticipate that Chinese authorities will increase targeted support measures to stabilize corporate profitability. This is especially relevant as consolidation accelerates in sectors facing weak demand, intense competition, and aggressive price wars.

Sophie Altermatt, an economist at Julius Baer, suggested that the utilization of existing fiscal resources will likely quicken in the coming months. She also noted that additional easing measures could be implemented if the economic slowdown continues. While these actions should offer some near-term stability and a floor for growth, a robust cyclical rebound is considered unlikely due to the ongoing property market slump, subdued household confidence, and restrained private investment, which are all limiting factors for recovery.