Analysts from Commerzbank, Charlie Ray and Dr. Henry Hao, noted a slowdown in China’s industrial profit growth, which reached 21.1% year-on-year in May. This decline, attributed to weak consumption and investment, signals a loss of momentum. They anticipate that the official PMIs for both manufacturing and non-manufacturing will begin to contract, even though Bloomberg’s consensus suggests these indicators are slightly above 50. While expectations for a rate cut are diminishing, there may still be an opportunity for the People’s Bank of China to lower rates by 10 basis points in the latter half of the year.
Earnings slowdown and PMI risk
“China’s industrial profits grew at a reduced pace in May, marking the first slowdown since November 2025. Profits rose 21.1% year-on-year, a drop from April’s 24.7%, and the growth rate for January to May was 18.8%, compared to 18.2% in January to April.”
“Despite the robust headlines, the softer tone indicates weakening momentum. Strong exports and increasing producer prices aren’t sufficient to compensate for the lack of domestic consumption and investment.”
“Looking forward, the National Bureau of Statistics will release the June Manufacturing PMI and Non-Manufacturing PMI on Tuesday. Bloomberg’s consensus forecasts both will barely remain in expansion territory at 50.1 for manufacturing and 50.0 for non-manufacturing, but we predict a contraction in both. Slower profit growth combined with weak consumption and declining investment continues to pressure policymakers to take action.”
“Nevertheless, the outlook for a rate cut is less optimistic, with just over half of economists surveyed by Bloomberg expecting the central bank to hold its policy steady until the end of 2026. There remains potential for a 10 basis point cut later this year.”
“In terms of policy, Vice Premier He Lifeng emphasized the need for expedited development in core technologies and increased technological independence during his visit to Sichuan. His comments reflect the government’s focus on advanced manufacturing as a key driver of structural growth, even though domestic demand remains sluggish.”
“On the foreign exchange front, USD/CNY increased by 30 pips to 6.80 last Friday, now sitting at 320 pips this week. Similarly, offshore USD/CNH rose 30 pips to 6.80 last Friday and is at 210 pips this week.”
