U.S. tariffs and prolonged deflationary pressures lead to a drop in Chinese industrial profits
Get the Inside Scoop on China's Industrial Profit Plunge
In a hard-hitting blow to China's economy, industrial profits plummeted drastically in May 2025, dropping a staggering 9.1% year-on-year – the worst dip since October last year. This decline, reflecting struggling domestic demand and external pressures, paints a bleak picture for businesses and threatens to curb future investment and hiring.
The setback can be chalked up to various factors, including:
- Insufficient Demand: Inefficient demand for industrial goods, particularly in sectors like minerals and motor vehicles, played a significant role in the decline 1.
- Plummeting Prices: A price drop in industrial products, coupled with falling global commodity prices, has taken a toll on profitability 13.
- Trade Tensions:US tariffs and ensuing trade tensions have dampened demand for Chinese exports, increasing the strain on industrial firms 1.
- High Base Effects: An unusually high level of investment income in previous years has made it hard for this year's profit growth to compare favorably 3.
- Sector-Specific Struggles: The mining sector saw profits dip by a substantial 29%, while automotive profits shrank by 11.9% in the first five months compared to last year 1.
The overall picture is not pretty, with industrial profits declining 1.1% in the first five months of 2025 compared to the previous year 13. Despite this, operating revenue increased by 2.7% year-on-year, hinting at a complex situation where sales are growing while profitability is stagnating due to factors like costs and demand issues 3.
This profit slump highlights the ongoing deflation worry and raises concerns about reviving industrial enterprise earnings in the face of policy stimulus 2. The slowdown affects key sectors like mining, automotive, and manufacturing, with far-reaching consequences for employment, investment, and broader economic growth.
In response to this crisis, Beijing has rolled out stimulus measures since a more severe dip in late 2024, but the latest data shows these efforts have had limited success in boosting industrial profits 2. The focus remains on stabilizing demand and providing support for strategic industries, with the equipment manufacturing sector showing profit growth of 7.2%, serving as a buffer 3.
Policymakers may continue to adjust stimulus and industrial policies to tackle the demand issue and trade pressures, albeit recet economic data has eased the urgency for immediate, aggressive measures 2. All eyes are on China as they grapple with this challenging economic landscape and attempt to stem the tide of industrial struggles, ensuring a pathway to growth and prosperity for the world's second-largest economy.
The financial sector might face challenges due to the industrial profit plunge in China, as struggling domestic demand and external pressures could impact investments and corporate finance. The slump in industrial profits has raised concerns about reviving enterprise earnings in the face of policy stimulus, which could have far-reaching consequences for China's broader financial and economic growth.
