China's industrial profit growth quickens even as Iran war heightens risks

BEIJING: Profits at China’s industrial firms grew ​at their quickest pace in half a year last month, adding to broader signs of ‌an uneven economic recovery in the first quarter as policymakers brace for the impact of the Iran war.

The export engine of China stuttered last month while retail sales and industrial output cooled, although producer prices emerged from a years-long deflationary stretch, ​a shift that analysts warn could leave companies boxed in by rising costs but limited ​pricing power as demand remains fragile.

“The data has likely not reflected the impact of ⁠the Iran war yet,” said Lynn Song, ING’s chief economist for Greater China, underscoring growing risks to ​growth at home and abroad from the conflict as governments and businesses scramble to soften the blow.

Profits at ​industrial firms rose 15.8% in March from a year earlier, picking up from a 15.2% jump in the January-February period, data released by the National Bureau of Statistics showed on Monday.

For the first quarter, industrial profits grew 15.5% year-on-year as economic growth accelerated to 5% after hitting a three-year low in the ​previous quarter.

The figures point to growing divergence beneath the surface of the recovery.

While pockets of the economy ​tied to artificial intelligence remain buoyant, with Shannon Semiconductor posting a 79-fold surge in first-quarter net profit on the back ‌of ⁠strong AI-related electronics demand, consumer-facing sectors continue to struggle. Premium liquor maker Kweichow Moutai reported subdued performance as chronically weak domestic demand weighed on pricing and volumes.

“There are many uncertainties in the external environment, and the contradiction between strong domestic supply and weak demand still needs to be resolved,” said NBS statistician Yu ​Weining.

Policymakers see their campaign ​to curb so-called “involution” – persistent, ⁠cut-throat price competition – as supportive for corporate margins over time, but its benefits are slow to materialise amid a sputtering recovery.

External risks are adding to the ​pressure. The Middle East crisis has heightened uncertainty over global demand and supply ​chains, threatening to ⁠further erode margins for Chinese manufacturers already grappling with soft orders and cautious spending by households and businesses.

“Moving forward, the higher energy prices are likely to translate into higher input costs for producers, which will either ⁠need to ​be passed on to consumers or absorbed through thinner margins ​and weaker profitability,” ING’s Song said.

Industrial profit figures cover firms with annual revenue of at least 20 million yuan ($2.93 million) from their ​main operations.