Profits for China’s industrial enterprises fell at a slower rate in May, following a dramatic drop in April, as activity in major manufacturing centres rebounded, while COVID-19 limitations continued to weigh on factory output and squeeze factory margins.

Profits decreased 6.5 per cent year on year, smaller than the 8.5 percent drop in April, according to National Bureau of Statistics (NBS) statistics issued on Monday.

Profits in the coal mining and oil and gas extraction sectors increased in May, as the Russia-Ukraine conflict spurred a surge in global commodity prices.

However, profits in the manufacturing sector fell 18.5 per cent in May as equipment manufacture improved dramatically, according to Zhu Hong, senior NBS statistician. Profits were down 22.4 per cent in April.

“Overall, the performance of industrial firms has shown some positive changes, but it should be noted that the year-on-year growth of industrial profits continued to fall, with rising cost pressure and difficulties in production and operation,” Zhu said, adding that the foundation for recovery was not firm.

Profit decreases of industrial enterprises in COVID-hit Shanghai, eastern state of Jiangsu, and northeastern provinces of Jilin and Liaoning all narrowed by more than 20 percentage points, according to Zhu.

The difference in profit margins in upstream and downstream sectors narrowed in May, according to Goldman Sachs analysts, who added that profit disparities between sectors and enterprises remained large.

Following lockdowns, several industries resumed operations in places such as Shanghai, but the sluggish property market and fears of future waves of illnesses have put a shadow over industry activity and prompted doubts about the world’s second-largest economy’s slowing recovery.

Profits at industrial enterprises increased 1.0 per cent year on year to 3.44 trillion yuan ($514 billion) in January-May, down from a 3.5 per cent growth in the first four months, according to NBS statistics.

Profits at automakers fell 37.5 per cent in the first five months, while those in the ferrous metal smelting sector fell 64.2 per cent.

Revenues for industrial enterprises increased 9.1 per cent to 53.16 trillion yuan over the same five-month period, slowing from 9.7 per cent growth in the first four months.

After falling the previous month, China’s economy showed signs of recovery in May as industrial production rebounded, but consumption remained poor, highlighting the difficulties for regulators facing the ongoing drag from tough COVID-19 regulations.

Despite an increase in total industrial output, China’s factory-gate inflation slowed to its worst rate in 14 months in May, weighed down by low demand for steel, aluminium, and other major industrial commodities.

With the domestic COVID situation stabilising and oil prices unlikely to rise much, Zheng Houcheng, director of the Yingda Securities Research Institute, forecasts higher industrial profit growth in June despite firm cost pressures.

China’s cabinet launched a series of fiscal, financial, investment, and industrial policies in May to deal with the COVID-induced damage to its economy.

The programmes demonstrate the government’s determination to support the economy, but economists say a 5.5 per cent growth target will be difficult to meet if China maintains its pricey zero-COVID control approach.

This month, the country pledged to increase economic support and implement additional policy measures while refraining from providing excessive amounts of money.

Liabilities at industrial enterprises increased 10.5 per cent year on year in May, compared to 10.4 per cent growth in April.

The industrial profit data set includes significant companies with annual revenues of more than 20 million yuan from their primary operations.

(Adapted from ChannelNewsAsia.com)

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