Chinese industrial firms’ profits increased last month at their fastest pace in six months. This momentum confirms signs of an uneven economic recovery in the first quarter, as policymakers prepare to face the repercussions of the conflict between Iran and Israel.
The country’s export engine slowed down last month, while retail sales and industrial production weakened. Additionally, producer prices emerged from several years of deflation. Analysts believe this shift could put companies in a bind between rising costs and limited pricing power due to fragile demand.
“These data probably do not yet reflect the impact of the war with Iran,” said Lynn Song, Chief Economist for Greater China at ING. She highlighted the increased risks facing national and international growth as governments and businesses strive to mitigate the shock.
Industrial profits surged by 15.8% in March compared to the previous year, following a 15.2% increase in January-February, according to figures released by the National Bureau of Statistics (NBS) on Monday.
In the first quarter overall, sector profits rose by 15.5% year-on-year, driven by an economic growth acceleration to 5% after hitting a three-year low in the previous quarter.
However, these statistics reveal growing divergences beneath the surface of the recovery. While segments related to artificial intelligence thrive – like Shannon Semiconductor posting a 79-fold increase in net profit in the first quarter due to demand for electronic components – consumer-oriented sectors continue to struggle. High-end spirits producer Kweichow Moutai reported mixed performances, with persistent weak domestic demand weighing on prices and volumes.
“The external environment remains very uncertain, and the contradiction between strong domestic supply and weak demand still needs to be resolved,” said Yu Weining, a statistician at the NBS.
Authorities are relying on their campaign against ‘involution’ – intense price competition – to support company margins in the short term. However, the benefits of this policy are slow to materialize in a sluggish recovery context.
External risks add pressure. The crisis in the Middle East has heightened uncertainty about global demand and supply chains, further eroding Chinese manufacturers’ margins, already facing weak order books and cautious consumers and investors.
“In the future, the rising cost of energy should result in higher production costs. These costs will either have to be passed on to consumers or absorbed, at the expense of margins and profitability,” added Lynn Song of ING.
The industrial profit data concern companies with an annual revenue from their main business activity of at least 20 million yuan ($2.93 million).
(1 $ = 6.8300 Chinese yuan renminbi)
