China's industrial recovery is losing momentum. Profits at the country's large industrial companies rose 4.2 per cent in August from a year earlier, the National Bureau of Statistics said on Monday, the weakest monthly increase this year and a sharp slowdown from 11.2 per cent growth in July. According to Bloomberg, it was the smallest gain since profits fell in November last year.
For the first eight months of 2026, industrial profits rose 15.7 per cent, easing from a 17.6 per cent increase in January to July. That marked the fourth consecutive month in which the year-to-date growth rate has slowed, from a peak of 24.7 per cent reached in April. The cumulative figure came in slightly below a Bloomberg Economics forecast of about 16 per cent. The statistics bureau's figures cover firms with annual main business revenue of at least 20 million yuan, around $3 million.
A recovery with two speeds
The headline numbers for 2026 still look strong by recent standards. Industrial profits grew only 0.6 per cent in 2025, the first annual increase after three consecutive years of decline, and they surged 15.2 per cent in the first two months of this year. The problem is the composition of that growth.
Much of the improvement has come from a narrow set of sectors tied to artificial intelligence and electronics. In the first seven months of the year, profits in the electronics sector more than doubled from a year earlier, contributing 9.3 percentage points of the overall growth, according to NBS statistician Yu Weining. Profits in the integrated circuit industry, including computing and memory chips, rose roughly 18.5-fold and accounted for more than 80 per cent of the increase in electronics. Mining profits also rose strongly, helped by higher commodity prices.
Outside those areas, the picture is weaker. Many manufacturers, from consumer goods to building materials, face soft domestic demand, intense competition and aggressive price-cutting. China's official manufacturing purchasing managers' index pointed to contraction in both July and August, and economic growth in the second quarter slowed to its weakest pace in more than three years.
Energy costs and weak consumers
Two forces stand out in the August slowdown. The first is energy. Oil prices have traded above $100 a barrel for much of September because of the conflict involving Iran and disruption in the Strait of Hormuz, and elevated prices through the summer have raised input costs for Chinese manufacturers. China is the world's largest crude importer, and although it has built large strategic reserves and diversified suppliers, higher fuel and feedstock costs squeeze margins across chemicals, transport and heavy industry.
The second is weak household demand. Retail sales growth slowed further in August, and the slump in urban investment deepened. The property sector, once the engine of Chinese growth, remains in a prolonged downturn, weighing on household wealth and confidence. Industrial output was supported by exports, which have remained resilient despite trade tensions, but exports alone cannot sustain profits when domestic prices are falling.
Producer prices tell a similar story. Factory-gate prices in China have been under downward pressure for much of the past three years as capacity additions in manufacturing outpaced demand, and although higher commodity prices have lifted some input costs this year, many manufacturers have been unable to pass those increases on to customers. The result is a squeeze on margins from both directions: costs rising with energy, and selling prices held down by competition. That combination helps explain why the August profit figure slowed so sharply even as output held up.
