The latest data from the National Bureau of Statistics (NBS) in China revealed that industrial profits in the first quarter experienced a smaller increase compared to the first two months of the year. The profits of China’s industrial firms only rose by 4.3% year-on-year, which is significantly slower than the 10.2% growth recorded in the initial two months. This slowdown in profit growth raises concerns about the overall health of the world’s second-largest economy.
The NBS did not provide a breakdown of the monthly profit numbers for January and February. Still, it noted that there has been a consistent rise in monthly profits since August 2023. Despite this positive trend, the 3.5% year-on-year decline in profits in March indicates a potential shift in momentum. The uneven performance of industrial profits month by month adds to the uncertainty surrounding China’s economic recovery.
While the first quarter saw solid GDP growth, other economic indicators like retail sales and industrial output point to weak domestic demand. This discrepancy raises concerns about the sustainability of China’s economic recovery. Senior officials at the central bank have already expressed caution regarding the surge in credit, as real credit demand continues to weaken. The lackluster domestic demand is becoming a significant challenge for China’s industrial sector.
Risks to Public Finances
Fitch’s recent decision to downgrade China’s sovereign credit rating to negative reflects the growing risks to public finances. The uncertainty surrounding the country’s transition to new growth models poses a threat to its economic stability. The industrial profit numbers, which cover firms with annual revenues of at least 20 million yuan, highlight the struggles faced by Chinese businesses amid intensifying competition and slowing demand.
The uneven recovery of China’s industrial profits underscores the fragility of the country’s economic situation. While there have been positive signs of growth in the first quarter, challenges in domestic demand and increasing uncertainties pose significant risks to China’s economic stability. It is imperative for policymakers and businesses alike to address these issues proactively to ensure sustainable growth in the future.