|

Tariffs bite, deflation drags: China’s factory profits plunge in margin meltdown

China’s industrial profit picture just took another hit, and it’s a bruiser. Profits slid 9.1% in May—the sharpest drop since last October—underscoring how U.S. tariffs and persistent deflationary undertows are gnawing away at the country’s manufacturing margins. The overall year-to-date number is still in the red at –1.1%, and the momentum is clearly rolling downhill.

Auto manufacturers are bearing the brunt, with profits down nearly 12% as the price war in EVs and traditional vehicles shows no sign of easing. The mix of oversupply, softening demand, and growing trade friction has turned the sector into a margin graveyard. It’s a red flag not just for company earnings but for broader industrial confidence—investment and hiring decisions are going to feel that chill.

What’s striking is that this profit contraction is coming even as industrial output rose 5.8% in May. So the top line might be growing, but the pricing power just isn’t there—classic margin compression, and a clear sign that deflationary forces are still embedded in the system.

Some bright spots do exist—equipment makers and appliance producers are seeing healthy gains, thanks to Beijing’s upgrade subsidy program—but they’re not nearly enough to offset the broader pressure.

Mining remains the laggard by a mile, with profits down 29% year-on-year through May. Coal and metal processors have been particularly battered, and the damage is bleeding straight through to the state-owned sector, which dominates the upstream economy.

Bottom line: this isn’t just a soft patch, it’s structural stress. Beijing may have paused the worst of the trade fight with Washington, but the tariff scars are showing—and unless demand picks up or pricing stabilizes, the pressure on margins and business sentiment will linger. Expect the policy calls for fresh stimulus to get louder.

Author

Stephen Innes

Stephen Innes

SPI Asset Management

With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

More from Stephen Innes
Share:

Editor's Picks

EUR/USD flat lines below 1.1900; divergent Fed-ECB expectations offer support

The EUR/USD pair struggles to capitalize on the overnight bounce from the 1.1835-1.1830 region and oscillates in a narrow band during the Asian session on Thursday. Spot prices currently trade around the 1.1875 area, remaining nearly unchanged for the day and staying within striking distance of an over one-week high, reached on Tuesday, amid mixed cues.

GBP/USD slips heading into the Thursday trading window

The Pound Sterling pulled back from four-year highs on Wednesday, weighed down by a combination of Bank of England dovishness and UK political uncertainty, even as the US Dollar weakened on soft labor market revisions. 

Gold posts modest gains above $5,050 as US-Iran tensions persist despite strong labor data

Gold price trades in positive territory near $5,060 during the early Asian session on Thursday. The precious metal edges higher despite stronger-than-expected US employment data. The release of the US Consumer Price Index inflation report will take center stage later on Friday. 

Bitcoin holds steady despite strong US labour market

Bitcoin briefly bounced from $66,000 to above $68,000 but slightly reversed those gains following Wednesday's US January jobs report. The top crypto is hovering around $67,000, down 2% over the past 24 hours as of writing on Wednesday.

The market trades the path not the past

The payroll number did not just beat. It reset the tone. 130,000 vs. 65,000 expected, with a 35,000 whisper. 79 of 80 economists leaning the wrong way. Unemployment and underemployment are edging lower. For all the statistical fog around birth-death adjustments and seasonal quirks, the core message was unmistakable. The labour market is not cracking.

XRP sell-off deepens amid weak retail interest, risk-off sentiment

Ripple (XRP) is edging lower around $1.36 at the time of writing on Wednesday, weighed down by low retail interest and macroeconomic uncertainty, which is accelerating risk-off sentiment.