China's industrial profits continue to fall, reflecting weak domestic demand

Deflation on the producer side remains severe, severely pressuring Chinese businesses. Despite better-than-expected second- quarter growth , price wars and sluggish consumption continue to hinder progress. The government is accelerating stimulus measures and aiming to create a unified domestic market.

The National Bureau of Statistics (NBS) revealed that profits of industrial companies in China continued to decline in June, affected by severe deflation on the producer side and sluggish domestic demand. This underscores the pressures facing businesses, despite the overall economic performance in the second quarter being stronger than expected.

Data from the NBS showed that profits of industrial companies fell 4.3 percent year-on-year in June, slowing from a 9.1 percent decline in May. However, profits in the first half of the year fell 1.8 percent, a larger contraction than in the first five months of the year.

The situation reflects the impact of a fierce price war, particularly in the auto and solar panel industries, which has prompted the Chinese government to vow to tighten controls on price competition, while state-owned automakers Guangzhou Automobile Group and JAC Group are expected to report record second-quarter losses next month.

Lu Ze, chief economist at Soochow Securities, said industrial profits could pick up as government measures, including the “used car for new car” scheme, help contain price wars and boost consumer demand. However, analysts said this round of supply-side reforms may not lift China out of deflation as quickly as in the past, as it faces employment challenges.

The situation was compounded by the fact that the producer price index (PPI), or factory-gate prices, fell to its worst level in nearly two years last month, which exacerbated the problem of oversupply. Yu Weining, a statistician at the NBS, said China needs to speed up the construction of a "uniform domestic market" and promote internal economic circulation to push forward the high-quality development of the industrial economy amid the complex external environment.

However, if classified by business type, it was found that in the first half of the year, state-owned enterprises' profits fell by 7.6%, while private and foreign companies' profits rose by 1.7% and 2.5%, respectively. The data covers companies with an annual core operating income of at least 20 million yuan.

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