China’s Industrial Profits Fall 1.8% in H1 2025 Amid Deflation and Tariff Pressures
China’s industrial sector remains under stress as profits at large industrial firms declined 1.8% year-over-year in the first half of 2025, reaching CNY 3.44 trillion, according to data released by the National Bureau of Statistics (NBS). This deterioration from the 1.1% contraction recorded in January–May marks the second consecutive monthly decline and underscores the persistent deflationary pressures and growing trade uncertainty stemming from escalating U.S. tariff actions.
Industrial Profit Breakdown and Sectoral Performance
The headline figure masks significant divergence across ownership types and industries:
A. Ownership-Based Profit Trends:
State-Owned Enterprises (SOEs):
Profit contraction deepened to -7.6%, compared to -7.4% in January–May, highlighting continued operational inefficiencies and declining returns from heavy industry and energy sectors.
Private Sector Firms:
While still in positive territory, profit growth slowed sharply to 1.7%, down from 3.4% earlier. This reflects weakened domestic demand and margin compression due to both input cost volatility and global trade headwinds.
B. Sectoral Divergence:
Sectors with Sharp Declines:
Coal Mining: –53.0%
Oil and Gas Extraction: –11.5%
Chemical Manufacturing: –9.0%
Textiles: –8.1%
Non-Metallic Minerals: –5.4%
These losses are largely tied to global commodity price normalization, weak export orders, and lower domestic energy demand amid a cooling property sector and infrastructure slowdown.
Sectors Posting Gains:
Agriculture and Food Processing: +22.8%
Ferrous Metal Smelting: +13.7%
Electrical Machinery & Equipment: +13.0%
Non-Ferrous Metals: +7.8%
General Manufacturing: +6.5%
Heat Production: +5.6%
Specialized Equipment: +4.4%
Automotive Manufacturing: +3.6%
Computers, Communications, and Electronics: +3.5%
These reflect structural upgrades and policy-induced demand, particularly for green transition technologies (e.g., EVs, battery metals, grid equipment).
Monthly Trends – June 2025 Snapshot
In June alone, industrial profits dropped 4.3% year-over-year, a moderation from May’s 9.1% fall, but still reflective of ongoing cyclical stress. The deceleration suggests some stabilization, possibly due to modest policy support and restocking ahead of further tariff deadlines. However, the risk of sustained contraction remains elevated, particularly if domestic demand remains subdued.
Macro Backdrop: Deflation and Tariff Drag
Two key macroeconomic headwinds shaped this profit landscape:
1. Deflationary Pressures:
China’s Producer Price Index (PPI) has remained in negative territory for over a year, eroding industrial margins. Falling input prices in upstream sectors (especially coal, oil, and chemicals) reflect excess capacity and weak construction demand. This has translated into price-led revenue declines, especially in commodity-linked industries.
2. Escalating US-China Trade Tensions:
The imposition of broad-based US tariffs, including a 50% duty on copper and earlier measures on pharmaceuticals, electric vehicles, and semiconductors, has distorted trade flows and discouraged forward investment. Exporters have increasingly shifted toward ASEAN and Middle Eastern markets, but profitability remains constrained due to tighter margins and logistical reconfiguration costs.
Policy Response and Constraints
In response to industrial strain, Beijing has loosened credit constraints for priority sectors, ramped up tax incentives for high-tech firms, and is expanding infrastructure outlays, particularly in energy transmission, AI, and rural development.
However, broader monetary easing is constrained by:
Rising capital outflows
RMB depreciation pressure (the yuan recently breached 7.35/USD)
Weak consumption indicators
These limit the PBoC’s ability to provide broad stimulus, forcing a more targeted fiscal and industrial policy approach.
Implications for Global Markets and USD Comparisons
Copper and Aluminum Markets:
China’s weaker industrial output may dampen global base metals demand, counterbalancing US tariff-driven supply tightness. This could limit USD-denominated commodity price inflation despite geopolitical supply risks.
Supply Chain Reconfigurations:
Foreign firms may continue to relocate intermediate manufacturing to Vietnam, India, and Indonesia—decoupling from Chinese upstream capacity. This realignment could impact USD trade flows, global FDI allocation, and multinational profitability.
US Import Pricing:
Lower Chinese upstream profits suggest less cost-push inflation from China-origin goods, which may assist the Fed’s disinflation goals. However, tariff-pass-through effects could raise end-consumer prices in the US, especially for electronics, chemicals, and auto components.
Conclusion and Forecast
China’s industrial sector remains under pressure, with profit divergence across industries widening due to deflation, tariff uncertainty, and shifting domestic priorities. Without a strong revival in internal consumption or a meaningful easing of trade tensions, the second half of 2025 is likely to see continued subpar profitability, especially for SOEs and traditional heavy industries. High-tech and green sectors will remain the primary bright spots, aided by targeted state support.
Source
National Bureau of Statistics of China. (2025) Industrial Enterprise Profit Data – June 2025.
Reuters. (2025) China’s Industrial Profits Decline Further in H1 2025 Amid Deflationary Drag.
Bloomberg. (2025) Tariffs, Deflation Weigh on China’s Manufacturing Profits.
S&P Global. (2025) China PMI and Industrial Output Trends – Q2 2025 Report.