Chinese industrial firms are experiencing a continued drop in profits, underlining cooling demand and deepening factory-gate deflation in the world's second-largest economy. Data published by the National Bureau of Statistics has revealed that industrial profits fell by 20.6% in the January-April period compared to the same period in 2022. Although this represented a slower rate of decline than the 21.4% logged in the first quarter, it highlighted the challenges facing the Chinese economic recovery.
The weakness of the recovery of effective demand has had a significant negative impact on the capacity utilization rate. The difficulty of reducing costs, combined with this lessened demand, limit the ability of the Chinese economy to rebound quickly. According to Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc., to achieve a full-year gain in industrial profit, more policy support and stimulus is urgently required. Pang predicts that the cumulative year-on-year growth may not return to positive territory until the fourth quarter.
The fact that profits continue to decline is further bad news for the Chinese economy, which is already grappling with the impact of COVID-19 and weakened export demand. The diminishing profits are expected to weigh on the already weak sentiment among businesses, holding them back from making significant investments. Although factory activity has picked up somewhat, industrial enterprises continue to struggle to rebound from last year's COVID-19 induced slump.
Ultimately, the recovery of the economy in China has faltered due to continuing weak demand for goods. Although consumer spending in services is driving the economic rebound to a certain extent, foreign purchases of Chinese products are slowing as developed economies seek to "de-risk" from China. Producer deflation is also impacting factories' ability to boost prices, which in turn, hurts profits. The producer price index experienced its biggest decline since May 2020, falling 3.6% on year in April.
In the first four months of the year, foreign firms recorded a 16.2% drop in profits, while private firms witnessed profits fall by 22.5%. Meanwhile, state-owned enterprises experienced a slip in profits by 17.9%. These figures suggest the current economic climate is challenging for firms of every size and type in China.