The latest official data from the Chinese government shows that the profits of industrial enterprises above a designated size dropped sharply by 9.1% year-on-year in May, bringing an end to the growth momentum of the previous two months. Faced with this cliff-like decline, experts point out that the escalation of the trade war between China and the United States is the core factor leading to the drastic profit drop. Amid persistent deflationary pressures and the dilemma of overcapacity, the prospects for China’s economic recovery remain bleak.
According to data released by the Chinese National Bureau of Statistics, the profits of industrial enterprises above a designated size in China declined by 9.1% year-on-year in May, a stark reversal from the 3.0% growth in April. This marked the largest decline in more than half a year since October last year. Cumulatively, profits for the first five months of this year decreased by 1.1% year-on-year, with the operating profit margin dropping to the lowest level since 2009.
Statisticians at the National Bureau of Statistics attributed the profit decline to “insufficient effective demand, falling industrial product prices, and short-term fluctuating factors.” They mentioned that the high base effect of investment income and other short-term factors dragged down profit growth by 1.7 percentage points in the first five months.
However, Chinese issues expert Wang He questioned the official explanation. He pointed out that China’s Producer Price Index (PPI) has been declining for 32 consecutive months, indicating that “insufficient effective demand” and “falling industrial product prices” are not new problems that surfaced in May. “Explaining the sudden reversal in profits in May with these long-standing factors is evasive and equivocal,” he told Epoch Times.
Wang He further stated that “April to May was a critical period with the escalation of the China-US trade friction and the full outbreak of the tariff war; this is the real ‘short-term factor’ that led to the sharp drop in industrial enterprise profits.”
In terms of industry performance divergence, China’s mining industry has been hit hard. Profits from the mining industry saw a significant decline of 29% in the first five months, amounting to only 358.04 billion yuan, becoming the main factor dragging down overall industrial profits. In contrast, the manufacturing industry saw a profit growth of 5.4%, reaching 2.02 trillion yuan.
Wang He’s analysis indicated that the woes facing the Chinese mining industry stem from the universal decline in global commodity prices due to uncertain economic prospects and “Trump’s global tariffs.” As the mining industry in China is predominantly controlled by state-owned enterprises, the sharp drop in mining profits directly dragged down the overall profitability of state-owned enterprises.
Data showed that profits of state-owned holding enterprises decreased by 7.4% in the first five months, while profits of private enterprises increased by 3.4%, and profits of foreign-invested enterprises including those from Hong Kong, Macao, and Taiwan slightly rose by 0.3%.
Professor Xie Tian from the Darla Moore School of Business at the University of South Carolina also acknowledged that while the overall decline in the Chinese economy is a major factor, the intensification of the China-US trade war starting from April has made a significant contribution to the sharp decline in industrial enterprise profits.
He pointed out that high tariffs have had a tremendous impact on bilateral trade between China and the US, as well as on the global economy. The unpredictability of policies has significantly weakened investor confidence, leading to a massive outflow of funds from the Chinese market.
Despite the overall decline in profits of Chinese industrial enterprises, profits from the manufacturing sector grew by 5.4% during the same period, driven by rapid growth in manufacturing sector investments. The seemingly contradictory phenomenon of declining profits and growing investments has raised further concerns among experts about overcapacity issues.
Wang He noted that in the absence of sufficient domestic consumption demand in China, excessive investment in the manufacturing sector can only rely on exporting to impact the international market, thereby triggering increasingly tense trade relations with various countries worldwide. He commented that “the Chinese Communist Party knows well about severe overcapacity but still continues large-scale investments in the manufacturing sector, not for economic reasons but for strategic considerations.”
He analyzed, “The Chinese Communist Party prioritizes the development of the manufacturing sector in preparation for potential future conflicts because the outcome of wars ultimately depends on the manufacturing industry.”
Wang He believed that from a purely economic standpoint, the current economic policies of the Chinese Communist Party are “completely wrong” and will only lead the economy to “dig deeper.” He emphasized that under normal circumstances, economic policies should cease massive investments in the manufacturing sector, but the current practice is actually “going against the grain” and exacerbating overcapacity issues.
Persistent monetary tightening has become the core issue hindering economic recovery. In May, the Producer Price Index (PPI) saw a 3.3% year-on-year decrease, marking 32 consecutive months of negative growth, with the Consumer Price Index (CPI) also experiencing several months of negative growth this year, highlighting the increasing deflationary pressures.
Wang He stressed that this is a clear signal of monetary tightening and not just short-term fluctuations but rather a trend. “Once monetary tightening sets in, it becomes harder to break than inflation,” he pointed out, adding that the current various stimulus policies can only be described as “superficial” or “misguided,” with almost no effectiveness while the negative impacts are pronounced.
Xie Tian believed that the existing policies of the Chinese Communist Party only address the symptoms and not the root causes of the economic issues, thus unlikely to bring about fundamental changes in the economy.
A survey by Reuters indicated that factory activity in China may contract for the third consecutive month in June, with the official Purchasing Managers’ Index expected to be 49.7, still below the threshold of 50. Wang He explained that although manufacturing investment is growing, declining profits and uncertainties make it challenging for factories to plan large-scale production activities.
“Companies are seeing growth in revenue, but declining profits, which means the more they do, the more they lose,” he stated, attributing this to the rapid cost increase resulting from post-tariff war adjustments in production and inventory structures. This “increased revenue but decreased profit” phenomenon reflects the deteriorating business environment for companies.
Regarding the recent trade truce between China and the US, Wang He believed that despite reaching a temporary agreement, the significant impact of the previously sky-high 145% tariffs on bilateral trade between the two countries persists. The crucial factor is the unpredictability of policies, which has greatly undermined confidence in future economic growth.
“While the trade truce mainly addressed the rare earths issue, although the tariffs have decreased, the various sectors remain cautious about future effective implementations, lacking confidence,” Wang He explained. He suggested that if the agreement can be effectively implemented, China’s economy may start to recover after September; however, any new variables could lead to a “bleak and dismal” outlook.
Xie Tian concluded that while the trade ceasefire may offer some temporary relief to export companies, the fundamental problems of the Chinese economy remain unresolved. With ongoing deflationary pressures, exacerbating overcapacity, and weak demand, “economic recovery may still be a distant prospect.”
The sharp decline in industrial profits in China exposes the fragility of economic recovery. Experts generally believe that amid intensifying uncertainties in the global trade environment and unresolved domestic structural issues, the continued weak performance of the Chinese manufacturing sector could further impede economic growth, making the economic outlook still full of challenges.