China's Factory Profits Plunged in May Amid Trade Upheaval

Economic stress has deepened in China with factory profits falling significantly in May from the previous year.

While a trade truce was negotiated with the United States after a flurry of tariff hikes in April, it was undermined by doubts on both sides and an agreement was only firmed up after a second meeting in London and the deal finally signed two days ago, according to the White House.

That underlying geopolitical friction and uncertainty rocked China’s over-reliance on manufacturing and exports. And not surprisingly, deflation deepened and the long-running property crisis has continued to undercut demand and growth in the world’s second-largest economy.

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A few signs, including an unexpected pickup in retail sales growth last month, suggested some resilience among households even though the general market consensus is that more policy support is required to bolster a fragile economic recovery.

Industrial profits down 9%

Data from the National Bureau of Statistics on Friday showed that profits at China’s industrial firms fell 9.1% in May from a year earlier, snapping a two-month growth streak.

The profit decline was due to “insufficient effective demand, declining prices of industrial products and fluctuations in short-term factors,” NBS statistician Yu Weining said in a statement.

Industrial profits slid 1.1% in the first five months of 2025 from the same period last year. This compares with a 1.4% increase in the January-April period.

China’s factory-gate deflation deepened to its worst level in almost two years last month while consumer prices extended declines.

Prices took a hit from US President Donald Trump’s tariffs on commodities, while domestic price wars hit gross margins, Xing Zhaopeng, senior China strategist at ANZ, said.

With US tariffs set to remain high, factories in China are facing immense strains, particularly in sectors such as autos where excessive competition has prompted an official call to end bruising price wars.

Local auto dealers have appealed for automakers to stop dumping cars on dealerships, saying the intense price war was damaging their cash flow, driving down their profitability and forcing some to shut.

“The impact of overcapacity and falling prices on enterprises is still emerging, and efforts need to be made to adjust supply and stabilise demand,” Feng Jianlin, chief economist at Beijing FOST Economic Consulting, said.

Profits at state-owned firms dropped 7.4% in the first five months. Private-sector companies recorded a 0.3% increase and foreign firms saw a 3.4% rise, according to a breakdown of the official data.

Industrial profit numbers cover firms with annual revenue of at least 20 million yuan ($2.78 million) from their main operations.