China's industrial firms were hit hard by the rising price of raw materials in May, as profits rose to 36.4% from a year ago but still lower than those reported earlier this month.
Official figures show that industrial profit growth slowed again in May. The rapid rise of raw material prices has squeezed margins and weighed on factory activity, slowing the increase as well.
The National Bureau of Statistics reported a 57% jump last month but profits rose only 36%.
The world's second-largest economy has largely recovered from disruptions caused by Covid-19, but it faces new challenges such as higher raw material costs and global supply chain crunches. Officials warn that China's recovery remains uneven. Imbalances in profitability became prominent between upstream and downstream firms due to high commodity prices, said Zhu Hong of the statistics bureau.
In the latest data, China's economic growth has slowed to its lowest level in more than a decade. The foundation for recovery is not yet solid," said Zhu Rongji on Wednesday morning at Beijing as he gave an update of Monday night announcements regarding gross domestic product (GDP) and trade surplus figures. "The international situation remains complicated so there may be slight fluctuations."
Industrial firms in China saw a significant increase of 83.4% from the same period last year, according to recent data released by Beijing's National Bureau of Statistics. Although this growth seems promising at first glance, factory-gate inflation has increased its rates for the past few months and poses risks on profit margins for mid and downstream companies as their goods continue to be more expensive than they were 12 years ago which could make it hard or even impossible for them to compete with other brands internationally without proper pricing strategies being implemented soon enough.
The Chinese government is in a tough spot. They don't want to let prices of metals get out of control, but they also need them for manufacturing products at home and abroad.
It's been reported that the world's second-largest economy began selling its own supplies from state reserves last month after China became too reliant on imports due to rising demand elsewhere. But with global markets recovering steadily, analysts are now saying this move will only have limited success as well since it doesn't address their steady increase in usage across other countries like India or Japan who haven't yet taken such drastic measures themselves
China's manufacturing data is expected to show weaker growth in activity, likely due to disruptions caused by Covid-19 flare ups at the country's major southern ports. Investors will be looking for trends in input costs and selling prices that may suggest margin pressure.
Liabilities at industrial firms were up 8.2 percent year-on-year at the end of May, versus 8.6 percent growth a month earlier—an alarming rate that can't be sustained for long without taking drastic measures to shore up revenue streams and stop losses from piling up.
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