China's Industrial Profit Growth Slows as Energy Price Boost Fades

China’s industrial profit growth lost momentum again in June, slowing for a second straight month as falling energy prices reduced the boost to sector revenues. According to data from the National Bureau of Statistics (NBS), profits at Chinese industrial firms rose 15.1% in June compared to the same period last year. This was lower than the 21.1% growth recorded in May, which had already marked the first deceleration since November of the previous year. Cumulatively, industrial profits in the first half of 2026 increased by 18.7% compared to the same period a year earlier, slightly below the 18.8% growth recorded in the January-to-May period. Despite the slowdown, China’s industrial performance this year still shows a significant recovery. After recording only modest growth in 2025, corporate profits have returned to double-digit growth thanks to a surge in investment in the artificial intelligence (AI) sector, particularly in the semiconductor and equipment manufacturing industries. The recovery has also been supported by the end of nearly three years of producer price deflation. Last year, industrial profits actually fell 3.6% in June and contracted 2.8% in the first half of 2025, meaning a low comparison base also helped this year’s increase. Producer prices also rose 3.6% year-on-year in the second quarter of 2026, the first increase since late 2022. However, economists believe this momentum is starting to weaken. The earlier price recovery was largely driven by a surge in global energy prices, while China’s domestic demand remains insufficient to sustain growth. LSEG data showed producer prices fell 0.3% month-on-month in June, the first decline since July 2025. This weakening was triggered by the normalisation of shipping traffic through the Strait of Hormuz, which pressured prices for crude oil, refined fuels, and petrochemical products. Market participants are now awaiting the outcome of the Chinese Communist Party Politburo meeting, typically held in late July. At this meeting, Chinese leaders will evaluate first-half economic performance and set the policy direction for the remainder of the year. A number of economists expect Beijing to signal stronger policy easing following the second-quarter economic slowdown, though the chances of a large stimulus package are considered slim. The Chinese government is expected to remain cautious as exports remain fairly robust, and Beijing is still trying to reduce excess production capacity in the manufacturing sector. Morgan Stanley’s Chief China Economist, Robin Xing, said policy support is likely to focus on accelerating fiscal spending rather than massive stimulus. ‘We expect a gradual increase in policy support, not a big-bang stimulus in one go,’ Xing said. He added that China’s economic growth is expected to remain fairly resilient thanks to strong exports, even though domestic demand is still weak. According to him, the AI-driven investment cycle, where China is a major hardware supplier, along with rising industrial investment in Asia, will continue to underpin the country’s economic growth.