Chinese industry profits are falling. Mining is the biggest drag

The Chinese economy is still struggling to catch its breath. The latest data from the National Bureau of Statistics shows that July saw the third consecutive decline in industrial profits, this time by 1.5% compared to last year. This is a continuation of June’s 4.3% decline, although in seven months the rate of decline improved slightly to -1.7% compared to -1.8% in the first half of the year.

Sales are growing, profits are shrinking

At first glance, the situation does not look dramatic, as sales of large companies increased by 2.3%, reaching 78 trillion yuan. The problem is that costs rose even faster – by 2.5%. As a result, the operating margin shrank to 5.15%, and companies have less and less room to absorb price shocks. On top of that, there are financial problems. Although assets grew by almost 5%, debts increased even more, raising the debt ratio to 57.9%. Companies also have to wait longer for money from their contractors – on average almost 70 days – while at the same time accumulating ever-larger inventories. This is a classic symptom of deflationary pressure, when production and sales are up, but profits are down and cash is returning to companies more slowly.

State-owned companies lose, private companies gain

The results are unevenly distributed between forms of ownership. State-owned companies recorded a 7.5% y/y decline in profits, which weighed heavily on the average for the entire sector. Meanwhile, private companies and enterprises with foreign capital came out ahead, with their profits increasing by 1.8%. This difference is not solely due to the current economic situation. State-owned conglomerates are less cost-flexible, slower to reorganize excess production capacity, and more cautious about price changes or offerings. Private and foreign players, on the other hand, adapt more quickly to the market, which gives them an advantage. Meanwhile, capital markets are reading this discrepancy well, as the main indices in Shanghai and Shenzhen are falling on high turnover, indicating that investors are taking an increasingly defensive stance toward the traditional “old economy,” favoring innovative and more profitable sectors instead.

Weak raw materials, relatively strong manufacturing

The biggest drag on Chinese industry remains mining, where profits have shrunk by as much as 31.6%. The situation is particularly dramatic in coal, which recorded a decline of 55.2%. Iron ore mining lost 33.7%, and oil and gas 12.6%. This is the result of declining commodity margins amid lower prices and weaker domestic demand.

The picture is better in manufacturing, which increased profits by 4.8%. The most notable sectors here are food (+14.5%), electrical machinery (+11.7%), electronics and computers (+6.7%), and industrial equipment (+6.4%). However, not all sectors are doing well – chemicals (-8.0%), textiles (-6.5%), non-metallic products (-5.6%) and pharmaceuticals (-2.6%) remain in the red.

The automotive sector in China has almost stopped growing, achieving only a symbolic increase of 0.9%. A striking example is the situation of the state-owned JAC group, which, despite its significant scale of operations, has suffered losses, highlighting how strong price and technological pressure can hit an industry that has been perceived as one of the pillars of Chinese industry. JAC’s financial results were affected by its involvement in the construction of a superfactory for the new luxury electric vehicle brand Maextro. The total investment in the production facility amounted to approximately 3.981 billion yuan ($523.82 million), with an additional 5.875 billion yuan allocated to the development of an advanced intelligent electric platform.

The upstream segment is seeing double-digit declines in profits, while the downstream segment is benefiting from better margins and fiscal support. July fuel oil imports rose to their highest level in seven months – up 40% month-on-month and 42% year-on-year – and refinery throughput reached 14.85 million barrels per day, an increase of 8.9% year-on-year. The data clearly shows that it is refineries and petrochemicals, rather than extraction, that are beginning to stabilize the entire sector.

Oil in China close to peak demand

Forecasts by major institutions and companies suggest that oil demand in China is approaching a plateau this decade. The increase in consumption is expected to be driven mainly by petrochemicals rather than road transport. The country’s largest oil players point to 2025-2027 as the peak consumption period, which is forcing a shift in capital strategies. Greater investment is beginning to be made in chemical complexes, plant modernization, and higher value-added products.

Factory deflation is keeping pressure on product prices, which, with rising component costs, is limiting the propensity to invest and hire. Consumption support programs, tax breaks, and higher infrastructure spending are cushioning the declines, but July’s contraction in new lending reveals the caution of banks and financing beneficiaries. The media point out that in practice this is a sign that monetary policy alone will not reverse the cycle unless it is synchronized with measures to reduce excess capacity and limit price wars in industries with chronic oversupply.

Trade tensions with the US have entered a period of truce, but uncertainty about the durability of agreements is dampening business confidence. Economists« statements point to the risk of escalating tariff barriers in an environment of already intense cost competition and overproduction. At the sector level, this is hitting solar panels, where leading companies are reporting wider losses. The market is absorbing volume, but at prices that undermine profitability. This arrangement is beginning to transfer price discipline to the entire supply chain, from materials to components.