Business Maverick

Business Maverick

China industrial profits drop on weak demand, falling prices

China industrial profits drop on weak demand, falling prices
Buildings are reflected in a window in Beijing, China, on Monday, 24 October 2022. (Photo: Bloomberg)

Profits at industrial firms in China plunged in the first two months of the year as factories had yet to fully recover from a Covid-induced slump and prices continued to decline.

Industrial profits in the January-February period dropped 22.9% from a year earlier, the National Bureau of Statistics said Monday. For the entirety of 2022, profits declined 4% from the prior year. 

“Even though industrial production rebounded, market demand hadn’t recovered completely,” NBS statistician Sun Xiao said in a statement accompanying the data. Sun added that the decline in revenue was greater than the drop in costs, weighing on gross corporate profits.

Foreign firms continued to lag behind others, with profits plummeting 35.7% in the first two months of the year from the same time a year prior. That compared to a drop of 9.5% for all of 2022. Profits at private firms fell 19.9% in the January-February period, while those at state-owned enterprises declined 17.5%.

The plunge in profits came despite data earlier this month showing industrial output rebounded in the first two months of the year to 2.4% after Covid restrictions were scrapped and as a wave of infections subsided. Producer deflation, though, deepened in February as commodity costs softened, a sign that some factories are cutting prices, resulting in falling revenue and smaller profits.

“Firms were not able to pass on the higher costs to downstream users as demand has yet to recover fully,” said Michelle Lam, Greater China economist at Societe Generale SA.

Monday marked the first time China reported profit data in 2023. The first two months of the year are typically combined to account for distortion effects because of the Lunar New Year holiday, which can fall in either month. Officials have not released single-month data for profits since last June. 

What Bloomberg Economics says … 

“We expected China’s industrial profits to post a smaller drop in the first two months of 2023 compared with 2022. Turns out, they cratered, with a 22.9% plunge. Clearly, the reopening lift to activity hasn’t yet done much for the bottom line. It will take more time for demand and confidence to strengthen.”

— Eric Zhu, economist

The economic recovery still faces headwinds from higher-than-expected unemployment and a continued slump in real estate investment — as well as an uncertain global environment that may weigh on demand for Chinese exports, which are already under pressure.

While China’s industrial production will “rebound”, according to Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd, “the prices will continue to be impacted by global central banks’ tightening monetary policies.” Xing added that the decline in industrial profit growth is expected to “narrow markedly going forward”.

Beijing is counting on a rebound in domestic investment and consumer demand to meet its economic growth target of about 5% this year. Economists surveyed by Bloomberg expect the economy to grow 5.3% this year. BM/DM

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