China’s Industrial Profits Rebound in June Though Headwinds Remain

Profits at China’s industrial firms bounced back to growth in June after two months in the red, underpinned by the resumption of activity in major manufacturing hubs, but fears of a COVID-19 resurgence have cast a shadow over future factory output.

Profits in June grew 0.8% from a year earlier, rebounding from a 6.5% decline in May, National Bureau of Statistics (NBS) data showed on Wednesday.

Buoyed by easing pandemic curbs and government stimulus, June’s data shows industrial firms are gradually coming back from painful supply chain disruptions in the second quarter.

The recovery in profit growth was driven by a pick-up in demand, said Zhou Maohua, an analyst at China Everbright Bank, adding it led to strong profit growth in the upstream sector.

Profitability in the middle and downstream manufacturing sectors, as well as producers of electricity, heat, gas, and water, also improved, he said.

NBS Senior Statistician Zhu Hong said in a statement that as the pandemic was effectively controlled and the industrial chain further recovered, industrial firms’ efficiency improved markedly.

Profits of industrial firms in the COVID-hit Yangtze River Delta region rose 4.6% in June following a 17.8% slump in May.

Profits of auto producers jumped 47.7% as production resumed in the major auto manufacturing hubs of Shanghai and northeastern Jilin province, with the sector being the biggest driver of the profit rebound among industrial firms, Zhu said.

For instance, Tesla achieved its highest monthly output at its Shanghai plant in June since it opened in 2019.

The profit rebound was encouraging, but Zhu said profit growth remained weak and the external environment was becoming more complicated and grim. “While costs keep rising, some firms are facing hardship in production and operation as well as potential losses.”

China’s economy braked sharply in the April-June quarter, highlighting the colossal toll on activity from widespread lockdowns that hit domestic consumption and business confidence.

Industrial firms saw their combined profits rise 1% to 4.27 trillion yuan ($631.1 billion) in January-June from the same period a year earlier. That matched the 1.0% growth pace in the first five months, the data showed.

Liabilities at industrial firms jumped 10.5% at end-June, also remaining the same as that as of end-May.

In June, China’s industrial output grew 3.9% from a year earlier.

Currently, risks of a COVID resurgence and the return of strict measures to stamp out infections across China pose challenges to factory production and recovery in the world’s second-largest economy.

The Chinese tech hub of Shenzhen told 100 major companies including iPhone maker Foxconn to set up “closed-loop” systems as it battles COVID-19, according to a document attributed to the local government on Monday.

Earlier this month, the port city of Tianjin, home to factories linked to Boeing and Volkswagen and other areas tightened COVID restrictions to fight new outbreaks.

Meanwhile, policymakers are scrambling to avert other problems such as a debt crisis in the property sector from spilling into the broader economy in a politically sensitive year.

Analyst say the official growth target of around 5.5% for this year will be hard to achieve without doing away with Beijing’s strict zero-COVID strategy.

The industrial profit data covers large firms with annual revenues of over 20 million yuan from their main operations.

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