China’s Industrial Profit Growth Hits Seven-Month Low Amid Economic Slowdown

China's industrial profits experienced their slowest growth in seven months during July, expanding by 11.2% year-on-year, as a deepening economic slowdown, soft demand, and weakening manufacturing activity weigh on the sector. This marks a noticeable cooling from the 18.7% profit growth recorded in the first half of the year.

Despite the recent deceleration, industrial corporate profitability has shown a significant recovery from previous years. After experiencing declines since 2021 and minimal growth last year, profits have surged into double digits this year, largely fueled by a global boom in artificial intelligence. The integrated circuit industry, particularly computing and storage chip manufacturers, saw profits jump 18.5% in the January-July period, accounting for over 80% of profit gains in the electronics sector. Additionally, a substantial increase in profits from optical fiber manufacturing contributed to the advanced manufacturing sector's performance.

Raw materials manufacturers also posted strong results, with profits up 55.2% year-to-date, boosted by rising prices in the petroleum processing industry due to Middle East supply disruptions impacting downstream chemical products. However, this positive trend is counterbalanced by significant downturns in other key industries. Furniture manufacturing profits, for instance, saw a steeper decline of 58.2% in the first seven months, worsening from a 52.7% drop recorded in June.

Tianchen Xu, senior economist at Economist Intelligence Unit, attributed the decelerating growth primarily to reduced investment in property and infrastructure, reflected in the deteriorating profits within the steel and cement industries. While the raw materials and AI supply chains remain robust, consumer-facing industries are facing considerable challenges.

The broader economic picture in China is also one of weakening momentum. Producer price inflation, which had accelerated significantly in June, slowed to a three-month low of 3.5% in July. This moderation suggests that the boost from surging global energy costs is waning, with domestic demand remaining sluggish. China's second-quarter economic growth also dipped to its slowest pace in over three years, and an activity tracker from Bank of America indicated widespread loss of growth momentum in July, with key indicators like retail sales, port throughput, and electricity production showing further weakness.

Economists anticipate that Chinese authorities will likely increase targeted support measures to stabilize corporate profitability amidst accelerating consolidation in sectors struggling with weak demand, intense competition, and aggressive price wars. While these interventions may offer some short-term stabilization, a strong cyclical rebound is considered unlikely due to persistent headwinds from the property market slump, subdued household confidence, and cautious private investment.