According to official data released on Thursday (June 27) by the Chinese Communist Party (CCP), the growth rate of industrial profits in May slowed significantly, highlighting the challenges faced by China amid weak demand and sluggish economic growth. At the same time, according to a survey, economists predict that China’s Purchasing Managers’ Index (PMI) for the manufacturing sector in June will shrink again.
The data released by the CCP’s National Bureau of Statistics showed that after a 4% growth in April, industrial enterprise profits only grew by 0.7% year-on-year last month. The growth rate of industrial profits in the first five months of this year dropped to 3.4%, down by 0.9 percentage points compared to the 4.3% from January to April.
Despite strong exports, China’s vast real estate industry remains deeply subdued. A series of market support measures announced by the CCP last month have proven ineffective, dragging down industries such as construction materials, home goods, and affecting overall consumer confidence.
Yú Wèiníng, a statistician from the Industrial Department of the CCP National Bureau of Statistics, stated in a release that, “Domestic effective demand still remains insufficient…the foundation for the recovery of industrial enterprise benefits is not yet solid.”
Data earlier in June from the China Passenger Car Association (CPCA) indicated that the automotive industry, a major contributor to consumer discretionary spending growth, reported a profit margin of 4.6% for the first four months of this year, lower than the average of 5% for the overall manufacturing sector.
The association mentioned that in the fiercely competitive domestic market, many automakers rely heavily on exports and high-end car models for most of their profits, leading to significant declines in profitability for many manufacturers.
Zhou Maohua, an analyst from Everbright Bank, commented, “The primary reason for the slowdown in profit growth is the lackluster demand recovery compared to supply, with industrial product prices overall still declining while production and operation costs have slightly increased.”
He added that intense competition among industrial enterprises has led to price declines, hurting overall industrial profit growth.
According to the CCP National Bureau of Statistics’ categorized data, profits for state-owned enterprises declined by 2.4% in the first five months, while profits for foreign-funded enterprises increased by 12.6%, and profits for private enterprises grew by 7.6%.
Reuters also released a survey on Thursday showing that for the second consecutive month in June, manufacturing activity in China may contract.
According to the median forecast of 19 economists, China’s Purchasing Managers’ Index (PMI) for June is expected to be 49.5. The dividing line between growth and contraction is 50.
Deutsche Bank (DZ Bank) has the highest forecast at 50.0, while Industrial Bank has the lowest at 49.1.
The Purchasing Managers’ Index is a survey based on business sentiment and sometimes presents a more pessimistic view than other data. However, disappointing industrial output and profit data for May in China indicate that companies have valid reasons to be concerned.
In May of this year, China’s exports exceeded expectations, suggesting that manufacturers are trying to find overseas buyers. But with Beijing’s trade relations with Europe and the US becoming increasingly tense, many experts question whether the strong export performance is sustainable.
Meanwhile, the prolonged real estate crisis continues to drag down domestic demand. Various signs indicate that the CCP is facing pressure to initiate new growth engines to reduce reliance on the real estate sector.