Profits falter again as deflation and weak demand keep China’s factories on a short leash

China’s latest profit scorecard for industrial firms told a familiar story with a slightly softer edge: the bleeding has slowed, but it hasn’t stopped. Corporate earnings across the industrial sector fell 1.5% year on year in July, marking a third consecutive monthly decline and leaving cumulative profits for January through July down 1.7% from a year earlier. It’s progress of the incremental kind—the year-to-date drop narrowed from the first half—but not enough to declare a turn in the cycle.
Look under the hood and you’ll find two economies trying to share one set of tracks. On one rail, parts of manufacturing are finding their footing, helped by demand for high-tech kit, power equipment, and upgrades tied to efficiency and grid resilience. On the other, mining and raw-materials players are still contending with soggy prices and slack downstream demand. The policy push to discourage ruinous discounting has taken some heat out of price wars, yet the longer arc of producer-price deflation continues to squeeze margins in capital-heavy industries.
External demand is a swing factor, not a savior. Exports have surprised on the upside in select categories, but the domestic canvas—property caution, uneven consumer spending, and wary private investment—keeps the overall picture muted. That mix explains why July can look better at the margin while still failing to lift the totals: gains in mid- and downstream niches don’t fully cancel out pressure on upstream and construction-linked sectors when new starts are thin and local governments are tightening their belts.
Beijing’s approach has been precise rather than panoramic. Instead of a blanket stimulus, policymakers have favored targeted credit and tax support for advanced manufacturing, incentives for equipment renewal, and guidance to temper destructive pricing. The strategy supports the economy’s long-term retooling but inevitably leaves some firms exposed in the short run—especially those with weaker balance sheets or heavy exposure to commodities. Profit improvement, where it appears, is therefore uneven by design.
The arithmetic firms face is unforgiving. With factory-gate prices stuck near zero or negative, revenue lines don’t do much heavy lifting, and higher volumes must carry most of the burden. Financing costs aren’t crushing, but they bite harder when top-line growth is scarce. That’s why the market reads July as a waypoint, not a destination: better breadth in manufacturing is encouraging; the aggregate still says “not yet.”
To move from “less bad” to “good,” China needs a clearer hand-off from policy scaffolding to private-sector momentum. A firmer household pulse would reduce the need for discounts; a steadier construction pipeline would improve throughput for upstream suppliers; and a plateau in producer deflation would give earnings leverage back to companies rather than consumers. Until those conditions arrive, expect the profit path to be choppy—improving in the right places, lagging in the heavy ones, and reminding investors that stabilization is a process, not an event.