China Macro Tracker: Engagement continues

Research evidence excerpt

China Macro Tracker: Engagement continues

Economics ● China

1 July 2026

Industrial profits: Energy, AI sectors outperformed, while downstream pressure lingered

China’s industrial profits growth slowed to 21.1% y-o-y, despite a lower base, suggesting a slowdown

in momentum. The bifurcation in results continued with upstream sectors (energy and non-ferrous

metals) and some industries benefiting from global AI-related demand still outperforming. Going

forward, profitability in oil-related upstream sectors may start to moderate following the easing of

Middle East tensions and gradual resumption in global energy supply, though robust worldwide AI

capital expenditure is expected to continue, supporting margins in the electronics sector. Excluding

these sectors, performance across other industries—mainly midstream and downstream—

worsened, with the drag increasing to 5.5ppt in Jan-May from 4.8ppt in Jan-Apr.

Rising energy costs have increased input-cost pressure across downstream sectors, whose

output prices have stayed muted, resulting in margin compression. In particular, y-o-y profits

declined by c11% in garments & apparel, c19% in leather and fur-related products, and c1% in

rubber & plastics, weighing on profitability (chart 4). Cost pressures are likely to ease, though

still tepid domestic end-demand remains a constraint for profit revival. Relatedly, China’s

cautious consumer (22 May) has meant lackluster performance in related categories. Y-o-y

profits in furniture, sports and recreational products and autos fell c58%, c7% and 20% in the

first five months of this year.

Meanwhile, weakness in property and infrastructure investment intensified since the start of Q2,

contributing to a 1.2ppt drag on headline profit growth in Jan-May from ferrous metals and non-