China’s industrial firms have witnessed a significant double-digit decline in annual profits during the first five months of the year. This decline is attributed to softening demand, which has squeezed profit margins and raised concerns about the country’s post-COVID economic recovery. With various economic indicators showing signs of weakening, including retail sales, exports, and property investment, there is growing anticipation for additional policy measures to bolster the struggling economy. This article explores the latest data, highlights the challenges faced by Chinese businesses, and discusses the need for policy support.
Continued Decline in Profits:
Data released by the National Bureau of Statistics (NBS) reveals an 18.8% year-on-year slump in profits for industrial firms, following a 20.6% contraction in the January-April period. The month of May alone witnessed a 12.6% decline in profits compared to the previous year, while April recorded an 18.2% drop. These figures indicate the sustained difficulties faced by businesses in China.
Challenges in Business Operations:
Wu Chaoming, deputy director of the Chasing International Economic Institute, emphasizes that the sluggish recovery in industrial profits highlights the ongoing challenges in business operations. These struggles further strengthen the case for additional policy measures to support companies and revive the economy. The decline in profits was widespread, affecting 24 out of 41 major industrial sectors. The petroleum, coal, and fuel processing industry experienced the most substantial decline at 92.8%.
Impact of Insufficient Domestic Demand:
According to NBS statistician Sun Xiao, the slow recovery in industrial profits can be attributed to the insufficient domestic demand, compounded by the increasingly complicated and severe external environment. Sun notes that the foundation for a revival in industrial profits remains fragile. Foreign firms witnessed a 13.6% decline in earnings during the January-May period, while private-sector companies experienced a significant slide of 21.3%.
Positive Signs in the Auto Sector:
Despite the overall decline, the auto manufacturing sector witnessed a doubling in year-on-year profits in May. However, it’s important to note that this increase partly reflects the poor performance of the sector in the previous year when COVID-related restrictions significantly impacted business operations.
Calls for Policy Support:
The patchy economic recovery in China has led global agencies like S&P Global and Goldman Sachs to revise down their growth forecasts for the country. With mounting pressure on the domestic front and softening demand in major overseas markets, economists expect policymakers to implement further support measures to stabilize the economy. Recently, China reduced its key lending benchmarks for the first time in 10 months and introduced a 520 billion yuan package of purchase tax breaks on new-energy vehicles until the end of 2027. Premier Li Qiang also expressed the intention to roll out more effective policy measures to expand domestic demand.
Cautionary Approach and Longer-Term Risks:
While policymakers aim to revive the economy, the Chinese government remains cautious due to concerns over local government debt and other potential longer-term risks. Striking a balance between stimulating growth and managing risks poses a challenge for policymakers.
Conclusion:
The decline in China’s industrial profits over the first five months of the year highlights the challenges faced by businesses and the need for policy support to strengthen the country’s economic recovery. With various economic indicators showing signs of weakness, additional measures are anticipated to stabilize the economy. Despite caution over longer-term risks, efforts to expand domestic demand and stimulate growth remain a priority. As China prepares to release its second-quarter GDP growth data, the focus will be on whether the country can achieve its growth target of around 5% for 2023.
