Chinese Q1 industrial profits sink more than expected

Investing.com -- Chinese industrial profits fell substantially more than expected in the year to March, data showed on Thursday, indicating that the country’s manufacturing sector was struggling to pick up despite the lifting of most COVID-related restrictions.

Industrial profits sank 21.4% in the three months to March 31, data from the National Bureau of Statistics showed. The decline was much bigger than expectations for a drop of 12%, and was in direct contrast to an 8.5% rise seen in the same period last year.

Industrial profits had shrunk nearly 23% in the first two months of 2023 - their worst decline since mid-2020, during the height of the COVID pandemic. 

Tuesday’s reading indicates that Chinese manufacturing activity - which usually acts as a bellwether for the economy - was still operating well below pre-COVID levels. Sluggish onshore and overseas demand has been a major headwind for the sector this year, amid deteriorating economic conditions in China’s largest markets.

A decline in profits in the automobile industry was a key drag on profits this year, amid an ongoing price war in the electric vehicles sector, as well as soft car sales so far this year. 

Sluggish property investment - which is a key source of demand for construction materials and equipment - also weighed on industrial profits, given that the real estate sector accounts for nearly a quarter of the country’s economy.

Chinese industrial production grew 3.9% in March, data showed earlier this month. But the reading was slightly below estimates for growth of 4%, missing market expectations for a second straight month. 

Weakness in the industrial sector further highlights the uneven recovery seen by the Chinese economy this year. While demand for services and travel rebounded sharply after the lifting of anti-COVID restrictions, the manufacturing sector has largely lagged such a recovery.

Still, China's economy grew by a bigger-than-expected 4.5% in the first three months of the year, driven largely by a rebound in consumption. But analysts are doubtful over whether this momentum will be maintained, especially as the manufacturing sector struggles.