China's industrial profits take a plunge: Economy looks for a makeover

China's industrial firms are grappling with a sustained decline in annual profits, further highlighting the need for increased policy support to bolster the country's post-COVID economic recovery, Reuters reported. The first five months of the year witnessed a double-digit profit slump, with a year-on-year contraction of 18.8 per cent, compounding the 20.6 per cent decline experienced from January to April.

These figures, released by the National Bureau of Statistics (NBS), underscore the overall weakening of the economy, evident in sluggish retail sales, dwindling exports, and a slump in property investment. Furthermore, the youth jobless rate reached a troubling high of 20.8 per cent.

Reuters quotedWu Chaoming, deputy director of the Chasing International Economic Institute, as stating that the sluggish recovery in industrial profits necessitates additional policy measures to assist struggling companies. The situation is particularly concerning given that industrial earnings alone contracted by 12.6 per cent year-on-year in May and 18.2 per cent in April.

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A Mirage of Hope

Although there are some glimmersof hope, such as the automotive sector witnessing a doubling in year-on-year profit in May, it is essential to note that this growth is partly attributable to the sector's poor performance during the pandemic-induced restrictions of the previous year.

Speaking to Reuters, NBS statistician Sun Xiaoexpressed apprehension about the increasingly complicated and challenging external environment, coupled with insufficient domestic demand, both of which continue to impede the revival of industrial profits. Sun emphasized the need for a more solid foundation to support the recovery. A breakdown of the data reveals that foreign firms experienced a decline in earnings of 13.6 per cent from January to May, while private-sector companies endured a significant slide of 21.3 per cent.

A Wave of decline across Markets

The impact of the profit decline is evident across various industrial sectors, with 24 out of 41 major sectors witnessing sinking profits. The petroleum, coal, and fuel processing industry reported the most significant slump, with profits plummeting by a staggering 92.8 per cent.

The initial impact of these figures was felt in the Chinese stock markets, with losses recorded in the morning session on Wednesday. However, some recovery has been observed during afternoon trading, resulting in a mixed performance for the main indexes.

In light of the uneven recovery in the world's second-largest economy, global agencies such as S&P Global and Goldman Sachs have recently revised their growth forecasts for China, anticipating a slowdown. Economists widely expect policymakers to introduce further support measures to stabilize the economy, as it faces both domestic pressures and softened demand in major overseas markets. China recently implemented its first key lending benchmark reduction in ten months in response to the faltering rebound. Additionally, a 520 billion yuan package of purchase tax breaks for new-energy vehicles was announced, valid until the end of 2027.

Speaking at the Summer Davos Forum in Tianjin, Premier Li Qiangexpressed confidence that China's second-quarter economic growth would outperform the first quarter and that the country is on track to achieve its 2023 growth target of approximately 5 percent.

Nevertheless, the Chinese government remains cautious about reviving the economy due to lingering concerns surrounding local government debt and other long-term risks. Reuters reported that the industrial profit figures cover firms with annual revenues of at least 20 million yuan ($2.77 million) from their primary operations.

The forthcoming release of China's second-quarter GDP growth data in mid-July will provide further insights into its economic performance and the effectiveness of policy measures implemented to support its recovery.

(With Inputs from Reuters)