MondayFounder

In a turbulent start to 2023, China’s industrial sector has witnessed a notable decline in profits, according to official data released on Saturday. Companies grappling with margin pressures and soft demand amidst a faltering economic recovery have experienced a 20.6% slump in profits during the period of January to April, compared to a 21.4% decline in the previous three months. The National Bureau of Statistics (NBS) revealed that April alone witnessed an 18.2% drop in profit year-on-year, following a 19.2% contraction in March.

The combination of unfavorable factors, including the base effect, short-term pressure on economic recovery, and the downward trend of producer prices (PPI), continues to affect industrial enterprises, particularly private and equity-owned companies. Bruce Pang, chief economist at Jones Lang Lasalle, commented on the situation, stating, “Overall, today’s data shows that industrial enterprises, especially private and equity-owned enterprises, continue to be affected by a combination of unfavorable factors such as the base effect, short-term pressure on the economic recovery and the downward trend of PPI (producer prices).”

Chinese companies are grappling with weakened domestic demand as well as a softening of demand in major export markets. April witnessed a deepening of producer deflation, with the producer price index (PPI) experiencing its sharpest decline since May 2020. Lenovo, the world’s largest PC maker, reported a significant decline in quarterly revenue and profit during January to March. In response to the ongoing slump in global demand for personal computers (PCs), Lenovo had to implement cost-cutting measures, including an 8% to 9% reduction in its workforce.

Producers of steel and other industrial metals are also bearing the brunt of the economic downturn. Steel reinforcing bar prices used in construction reached a three-year low this week, with only a third of the country’s mills currently operating at a profit, as reported by the consultancy firm Mysteel. Baosteel, a subsidiary of China Baowu Steel Group and the world’s largest steelmaker, highlighted the continued pressure faced by the industry, stating, “There is still some pressure felt in May due to the difference between the purchase and sales prices, with steel prices falling in the month because of the slower-than-expected demand recovery.”

Foreign firms experienced a 16.2% decline in profits from January to April compared to the previous year, while private-sector companies recorded a substantial 22.5% plunge. Among the 41 major industrial sectors, 27 reported sagging profits during this period. The ferrous metal smelting and rolling processing industry faced the most severe slump at 99.4%.

Looking ahead, China’s focus will be on revitalizing and expanding demand, enhancing production and marketing capabilities, and boosting business confidence, as stated by NBS statistician Sun Xiao.

These concerning profit figures follow a series of economic indicators for April, including industrial output, retail sales, and property investment, that suggest a waning momentum in the recovery of the world’s second-largest economy. With a modest growth target of approximately 5% set for this year, Beijing finds itself revising growth estimates downward. Institutions like the World Bank, which had initially raised their China growth estimates for 2023 in light of a promising recovery after the country’s abrupt end to Covid restrictions last year, are now met with disappointment. Nomura has adjusted its growth prediction to 5.5% from the previous estimate of 5.9%, and Barclays has revised its outlook to 5.3% from 5.6%.