What China's Industrial Data Is Really Saying
Company profitability is the most important Chinese economic data point
Key Points
Industrial profitability stats tell us much more about China’s economic wellbeing than GDP stats
Industrial profits have been declining – hard – for four years.
There have been some small green shoots this year for Chinese industrial profitaility this year
It remains government policy to produce too much, despite claims to the contrary.
Intro
This is a change of pace for this publication – usually it is about new bio-builds in China. But China’s biomanufacturing revolution occurs within the bigger frame of the Chinese economy.
If you are an investor, importer, government official working on economic security or competitor with Chinese manufacturing, there is much Chinese data out there. Much of it not helpful.
Industrial profits are more useful than GDP
China’s Q2 economic data was recently released. Its YoY GDP growth was 4.3% which by China’s past few decades is pretty slow growth.
But, in my view, it no longer tells us anything meaningful.
1)For the average person, China does not feel like an economy growing at 4.3%. For all of China's continued export prowess, the domestic economy remains under strain. China's largest fiscal revenue sources—tax revenue, non-tax revenue and land-sale revenue—have declined substantially from their 2021 peak (see Figure 5 in the link). House prices have fallen for roughly four years (although in many parts of the world housing has become unaffordable, so lower prices are not entirely negative). Wage growth for many ordinary workers has slowed to the low single digits, although scarce, highly specialised AI and semiconductor talent can still command rapidly rising salaries. China's major stock market indices, despite a recent rebound, remain below their previous peaks. It also remains difficult to move money out of the country.
Thus, it is challenging for the average person to build wealth. This is not typical of an economy growing at 4+%. The counter would be that Chinese public amenity has dramatically improved which is fair. This means, an average Chinese person, while unable to rapidly build wealth, enjoys a decent standard of living. But it has become harder for them to afford to go abroad. It is an amenity cage of sorts.
2) 4.3% is not slow growth for an economy of China’s wealth and size. The media focuses on “China’s economy is slowing”. That’s true. But if China is able to maintain 4% growth (even 3.5% growth), its total economic size will continue to grow more quickly than the rest of Asia because it is already the biggest economy by a long way (4% growth on 20 trillion is a lot more the 7% growth on 4 trillion – India’s GDP). So, we have strong economic growth and weak economic conditions.
3) The figures might be massaged. There are lots of alternate estimates that suggest China’s growth is slower than official figures. I’m not sure. It is entirely possible that China is still building enough factories and infrastructure (not real estate anymore) that GDP is close to its real figure – even if that has little bearing on individual well-being. China’s exports just keep growing and growing and growing. We (analysts) end up throwing around all sorts of numbers based on partial evidence from outside the government.
So, if GDP is either unreliable or unrepresentative, where do we look?
Industrial profits have been a blood bath
The place I look for the real story of China’s economy is industrial profits. This tells an observer whether all of China’s industrial output has translated into actual wealth. It avoids the question of non-representative GDP data and tells us whether all this extra production is making money.
Don’t listen to news reporting which often focuses on single months. Look for long term series trends. I find these in two ways. 1) CEIC collates all Chinese economic data in a single easy-to-manage place (it is paywalled). The two series I read are “Total Profit: Industrial Enterprise” and “CN: No of Loss Making Ind Enterp: Total” 2) The same series are publicly available through China’s National Bureau of Statistics (NBS), titled “Profits of Industrial Enterprises Above Designated Size (规模以上工业企业利润总额)”. But the data is cut and presented in ways that are intended to make the economy look good. You have dig into the bowels of the NBS data to collate it in the same way as the CEIC data which is very annoying, even using an AI agent.
After extracting the aforementioned data, a clear trend emerges. China industrial profit (This covers firms with annual revenues of at least 20 million yuan from their main operations) has been declining for four years, despite sustained export growth.
This tells us that companies, despite producing more, are making less money. That sounds like overproduction (or overcapacity), and it makes the claims of dumping on international markets understandable. It also explains the GDP-growth vs average Chinese person outcomes. GDP growth occurs because factories are built and stuff is produced. But the average person does poorly because of lack of profit.
This translates into the percentage of unprofitable industrial companies steadily rising since 2017. (I used ChatGPT to create the graph below based on several CEIC datasets).
Overall, Chinese industrial firms are making less money, and 25% of the time losing money. So, it’s no wonder the average person feels poorer.
Why is this happening?
China views manufacturing prowess as a source of security in a volatile world. And it views technology – including manufacturing of technology – as the solution to economic malaise. This is topped by hyper intense regional competition in China that props up unprofitable companies longer than would happen elsewhere. This drives down wages and domestic consumption because money is being put into unprofitable factories rather than household wealth.
In theory, China is prioritising high-tech manufacturing over mature technologies (something we write about all the time in this blog). But as Yasheng Huang writes: “The puzzle is not why China exports cars, but why it is still exporting t-shirts.” Once manufacturing goes into to China. It rarely comes out.
There are two Chinese government quotes that capture this essence.
Xi Jinping 2020: “We must tighten international production chains’ dependence on China, forming a powerful countermeasure and deterrent capability against foreigners who would artificially cut off supply [to China]”
The NDRC’s (China’s government macroeconomic planning agency) most recent annual report: “In emerging industries, we will allow appropriate surplus capacity and encourage competition and innovation.”
So, it is government policy to produce too much, despite claims to the contrary, even if it is trying very hard to direct that overcapacity into new areas.
To be very clear, Chinese firms are taking up the task. There are fantastic new technologies both at scale and in the lab in China (again, the whole purpose of this entire Substack). It is incredible. But it still sits within a broader framework that for quite some time there has been an increasing number of unprofitable companies accross the whole economy.
The bet is that leading in new technology will get China out of these doldrums.
The changes this year: A concentrated number of firms are making more money. But the number of unprofitable firms remains the same.
There is, however, an important caveat. Over the past few months, headlines such as “China industrial profits stay resilient as economy leans on factories, exports” have become increasingly common. They are not wrong. Since around March, China’s industrial profits have staged a recovery compared to last year. Though they remain below 2021 levels.
Yet, the % of unprofitable companies remain the same. What that tells us is that – over a very short time period compared to the extended decline – is that a group of companies are doing well while the rest of the economy is still stuck in the same muck.
And as the next section shows, even the sectors making money have razor thin margins.
What sectors have done well?
The NBS publishes sector-wide profitability numbers. The data suggest that, among the biggest industries, there are three areas experience growing profitability in this calendar year: computing equipment (incl. chips); metal refining and smelting (like aluminium and copper); raw chemical materials (see table at end). The rest are doing terribly still.
All of these are inputs into China’s manufacturing machine. Prices for these types of products have grown, that explains some of the margin gain. But not all of it. It suggest there must be some cost reduction by the manufacturers themselves. Perhaps they shutted excess capacity.
Finally, the profit margin for all these industries is exceptionally low. It is so hard to make money in manufacturing these days anywhere in the world. Because China is the world’s factory and its companies aren’t making margins. So global competitors end up in the same boat.
If we see this profitability continuing to rise and going into a wider range of companies then that would be fair play to China - they would have found a way to turn massive production into profits. I’m not conviced it will happen economy-wide (although China has a habit of proving people wrong). I believe we will see hugely innovative new companies come out of China at a rapid rate.
But every time you see the headlines one way or another on China, just go check industrial profitability year-on-year for the last decade. It will tell you the true story.
Table: Profits of Industrial Enterprises in Major Industries
Source: National Bureau of Statistics of China (2026), 2026年1—5月份全国规模以上工业企业利润增长18.8% (“Profits of Industrial Enterprises above Designated Size from January to May 2026”), Table 3: Key Financial Indicators of Industrial Enterprises above the Designated Size from January to May 2026 (By Industry). The aggregate utilities sector is taken from Table 1. Profit margins are calculated by the author as Total Profit ÷ Business Revenue.