China's industrial profits saw a slight dip in the first two months of 2025, as companies grapple with ongoing deflationary pressures and the looming threat of trade tensions. The latest official data reveals that profits for major industrial firms fell by 0.3% in January and February compared to the same period last year. This follows three years of significant profit declines and highlights the continued challenges for China’s economy, despite efforts from the government to stimulate growth.

A Closer Look at the Profit Decline

While the headline number might seem minor, the underlying details show mixed results across different sectors. For example, the manufacturing and raw material sectors showed modest gains, helping to offset deeper losses in other areas. The manufacturing sector saw a 4.8% increase in profits, while the utilities industry, which includes electricity, heat, gas, and water supply, posted a strong 13.5% jump. However, the mining industry experienced a sharp 25.2% profit drop, a clear indication of the ongoing struggles in resource-based industries.

State-owned enterprises (SOEs) were among the few to show positive performance, with their profits increasing by 2.1%. Foreign-invested companies fared better, with a 4.9% rise in profits. These figures underscore the resilience of certain sectors and companies within China's broader industrial landscape, but they also highlight the challenges faced by others.

Deflation and Tariff Risks Cloud Economic Outlook

The underlying deflationary pressures continue to weigh on China's industrial performance. The nation's Consumer Price Index (CPI) turned negative for the first time since early 2024, signaling a cautious consumer sentiment. With household spending constrained due to the ongoing real estate slump, China's economy is facing a tough balancing act. While government stimulus measures have started to take effect, their impact is limited in the face of rising global uncertainties.

Moreover, U.S. trade policies remain a significant concern. Just weeks into President Biden's term, the U.S. has already imposed new tariffs, including a 25% tariff on foreign-made vehicles, set to take effect on April 2, 2025. This move is expected to exacerbate the challenges faced by Chinese manufacturers, many of whom rely heavily on exports to the U.S. market.

Government’s Ambitious Growth Target and Stimulus Measures

China's government has set a target of "around 5%" economic growth for 2025, which analysts agree will require further stimulus measures to achieve. Beijing has already launched several rounds of stimulus in 2024, including expanding the consumer goods trade-in program to boost domestic demand. These measures helped China meet its growth target of around 5% last year, but more action will be needed to shield the economy from external shocks.

Economists from major banks have raised their projections for China’s GDP growth this year, with HSBC, Citi, and ANZ all revising their forecasts upwards. HSBC and ANZ now expect China’s GDP to grow by 4.8%, while Citi predicts a more conservative 4.7%. However, the shadow of rising tariffs continues to cast a long-term risk over these projections.

Mixed Recovery Signals in Key Economic Indicators

Despite the profit decline in industrial sectors, there are signs of a mixed recovery. Retail sales grew by 4% in the January-February period, a faster pace than December 2024. Both fixed asset investment and industrial output also exceeded expectations. However, the momentum in exports, a key contributor to China's GDP, showed signs of slowing down. Exporters, who rushed to meet shipping deadlines ahead of the new U.S. tariffs, have seen a reduction in activity as the front-loading effect fades.

At the same time, consumer confidence remains subdued. The CPI decline is just one example of the pressure on consumers, who are hesitant to spend amid ongoing economic uncertainty. Unemployment is also on the rise, with the national unemployment rate hitting its highest level in two years at 5.4%. The urban jobless rate for individuals aged 16 to 24, excluding students, also rose to a concerning 16.9%, marking the highest level in four months.

What Lies Ahead for China’s Economy?

As China’s industrial profits face a bumpy road ahead, policymakers will need to act swiftly to maintain the fragile recovery. More targeted stimulus measures will likely be needed to offset the negative impact of global trade tensions, especially as U.S. tariffs continue to rise. Despite the mixed signals, there’s hope that the economy can still avoid a full-scale slowdown if the right policy measures are implemented.

Key Takeaways:

• Profits Down, But Some Sectors Show Gains: Industrial profits fell 0.3% in the first two months of 2025, but sectors like manufacturing and utilities posted positive results.
• Government Stimulus Efforts Continue: Beijing has set a growth target of 5% for 2025 and is expanding stimulus measures, but tariffs and deflation remain significant hurdles.
• Tariffs and Global Risks: Rising U.S. tariffs, including a 25% tariff on foreign-made vehicles, add pressure to China’s industrial sector.
• Mixed Recovery Signals: Retail sales and industrial output show recovery, but consumer confidence remains weak, and unemployment is rising.

As China continues to navigate these challenges, the next few months will be crucial in determining whether the government’s stimulus efforts can create a sustained recovery or if external risks will continue to dampen the country’s growth prospects.

‍

‍