Industrial divergence behind the resilience of China's industrial profit growth

Profit Growth Slows, but Structural Divergence Reveals Industry Transformation

According to the latest data from China's National Bureau of Statistics, profits of industrial enterprises above a designated size grew 21.1% year-on-year in May, down from 24.7% in April, but still maintaining double-digit growth. Cumulative profit growth from January to May was 18.8%, slightly higher than the 18.2% in the first four months. On the surface, industrial profits are showing strong resilience, but the sharp internal structural divergence reflects the deep adjustments that China's manufacturing sector is undergoing.

AI Investment Dividend: Electronics Industry 'Takes the Lead'

The highlights of profit growth are concentrated in two areas: computer, communication, and other electronic equipment manufacturing, as well as upstream resource industries. Profits in the electronic equipment manufacturing sector soared 103.9% from January to May, contributing 43.1% of the total industrial profit growth. This explosive growth is not driven by a recovery in traditional consumer electronics, but by the spillover effects of global artificial intelligence (AI) infrastructure investment—the surge in orders for data centers, AI servers, high-performance chip packaging, and other components has significantly improved the profits of related enterprises. This marks the upgrade of China's electronics manufacturing industry from assembly and OEM to key nodes in the AI hardware supply chain, with a notable increase in industrial added value.

Upstream Industries Benefit from Rising Commodity Prices

During the same period, profits in the non-ferrous metal mining and processing industry increased by 93.9%, reflecting the transmission of global raw material price increases to domestic profits. International prices of metals such as copper and aluminum remain at high levels, coupled with stable demand in domestic new energy and power equipment sectors, enhancing the profitability of upstream resource companies. This trend aligns with the accelerated rise in the Producer Price Index (PPI)—the year-on-year increase in PPI in May hit a new high in nearly four years. The transmission of cost pressure from upstream to downstream is not smooth, leading to a further tilt of profit distribution toward the upstream.

Downstream Manufacturing Under Pressure: Sharp Profit Declines in Automobiles and Furniture

In stark contrast to the upstream and electronics industries, downstream manufacturing profits generally contracted. Profits in the automobile manufacturing industry fell by 19.8%. Although exports were strong, intense competition in the domestic market and price wars continuously eroded corporate profits. Profits in the furniture manufacturing industry plummeted by 58.4%, reflecting the drag of the prolonged real estate downturn on related consumer goods sectors. In addition, profit growth in industries such as textiles and general equipment was weak or even declined, indicating that weak end demand and overcapacity issues have yet to ease.

Exports and Factories: The Dual Engines and Hidden Concerns of Economic Growth

Currently, China's economic growth is highly dependent on factory production and exports. The cumulative positive growth in industrial profits from January to May indicates that the manufacturing sector as a whole remains resilient. However, this growth model faces three major challenges: the deep adjustment of the domestic real estate market is curbing domestic demand, and consumption recovery is slow; geopolitical conflicts in the Middle East may push up energy prices and shipping costs, squeezing downstream profits; and the escalation of trade barriers in markets such as the United States increases export uncertainty.

Policy Direction: Targeted Support and Industrial Integration## Policy Direction: Targeted Support and Industry Consolidation

Analysts expect that policymakers will increase targeted policy efforts to stabilize corporate earnings. Especially in industries plagued by overcapacity and intensifying vicious competition, such as automotive and photovoltaic, industry consolidation may accelerate. Meanwhile, the central bank has recently guided some commercial banks to expand credit supply, reflecting that credit demand in the real economy remains weak. In the future, the policy focus may shift from aggregate stimulus to structural support, prioritizing the financing needs of high-tech manufacturing, AI infrastructure, and areas related to "new quality productive forces."

Industry Observation: The "Ice and Fire" of Manufacturing Upgrades

The latest profit data further confirms that China's manufacturing sector is experiencing a polarization of extremes—high-tech fields like AI, new energy, and new materials are rising rapidly, while traditional consumer manufacturing and real estate-related manufacturing continue to shrink. This divergence is essentially an inevitable growing pain of industrial upgrading. For investors and supply chain managers, two trends deserve attention: first, whether the global AI capital expenditure cycle can sustain the profit growth of China's electronics supply chain; second, how the pace of domestic demand recovery and changes in energy prices will affect the profit inflection point for downstream manufacturers.