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China factory profits slip as overcapacity troubles economic recovery

April 28, 2024
in Finance
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China factory profits slip as overcapacity troubles economic recovery
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Factory profits in China have retreated from a two-year high, according to official data, highlighting concerns that industrial overcapacity is complicating Beijing’s efforts to revive momentum in the world’s second-biggest economy.  

Industrial profits at large Chinese companies declined 3.5 per cent in March from a year earlier, the National Bureau of Statistics reported on Saturday. Across the first quarter, industrial profits rose 4.3 per cent compared with the same period in 2023.

The March reading was a blow to Beijing after industrial profits in the January-February period jumped 10 per cent to hit a 25-month high, raising hopes that the downturn in the industrial sector was bottoming out.

Goldman Sachs analysts said both industrial profits and revenue fell “notably” in March and highlighted lower margins as a problem for Chinese industry.

The latest signs of stress in the Chinese economy come as officials in the US and Europe have raised alarms about Chinese policymakers’ plans to use the country’s manufacturing heft, including via exports, to boost growth.

On a three-day trip to China last week, US secretary of state Antony Blinken warned President Xi Jinping’s administration against heavy state subsidies for industry, saying there was already a “clear mismatch” between China’s production and global demand.

Below-market prices for Chinese products could have “potentially devastating effects” on workers, communities and businesses overseas, Blinken said.

China’s foreign ministry said on Friday that officials had “refuted” Washington’s narrative on overcapacity in meetings with Blinken, and dismissed criticism of Chinese industrial policy as another example of US protectionism and suppression of Chinese development, according to state media.

China set a growth target of about 5 per cent for 2024, the same as last year — the lowest in decades — but analysts have cautioned that the figure remains ambitious amid widespread deflationary pressure and would require increased stimulus support.

“Benign supply chain conditions, plentiful inventories and industrial overcapacity in China will help to keep a lid on core goods inflation,” Capital Economics analysts Simon MacAdam and Ariane Curtis wrote in a research note.

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Analysts from Westpac, the Australian bank, said that steel industry exports have been an important “release valve” for overcapacity, noting that China is approaching record levels from 2015 in steel exports, despite a rising global backlash to dumping excess products overseas.

The NBS struck a more positive tone on Saturday, reporting that in the first quarter, electronic industry profits were 82.5 per cent higher year on year, while auto manufacturing profits were up 32 per cent for the same period.

State media also expressed confidence in Beijing’s plan to further boost consumer spending by subsiding trade-ins of older cars and household appliances.

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