Official data released on Thursday showed that profits at China's industrial firms grew at a slower pace in July, with the year-on-year increase easing to 11.2% from 15.1% in June, while revenue growth also cooled to 6.5% from 11.2% during the same period. This moderation aligns with the softening trends in nominal growth and the producer price index (PPI). Notably, the divergence across industries widened further, with profit improvements concentrated in select upstream sectors and AI-related industries, while domestic demand-oriented segments continued to weaken. Profits in upstream industries and the computer/communications sector rose 44.3% and 151.7% year-on-year in July, contributing 4.9 and 13.5 percentage points respectively to overall industrial profit growth. Excluding these two segments, profits in other industries contracted by 9.1% year-on-year, a sharp reversal from June's 6.0% growth, highlighting escalating sector divergence.

Specifically, falling international oil prices in July continued to weigh on the petrochemical chain's profitability, while coal and nonferrous metals saw profit improvements. Upstream industry profit growth accelerated to 44.3% in July from 33.4% in June, driven mainly by coal and nonferrous metals. The coal sector's profit growth jumped to 130% from 83.2% in June, contributing 4 percentage points to overall industrial profit growth. Nonferrous metal mining and smelting profits rose to 47.8% and 48.9% respectively from 24.8% and 39.9% in June. However, due to oil price volatility, profits in oil and gas extraction, petroleum processing, and chemical products continued to decline year-on-year to 7.4%, -131.2%, and -7.3% respectively.

AI-driven demand continued to propel related industries to lead profit growth. In July, computer and communications manufacturing profits surged to 151.7% year-on-year from 80.1% in June, with its contribution to overall industrial profit growth rising to 13.5 percentage points from 10.2 percentage points in June. While revenue growth accelerated further, profit margins saw a slight pullback. Notably, South Korea's semiconductor export growth in the first 20 days of August rose to 198.8%, up from 180.7% for the full month of July, indicating the semiconductor cycle remains at a high level and is likely to continue supporting profit growth in related industries.

Domestic demand-related sectors faced mounting profit pressure, with industry divergence intensifying. Profits in other industries (excluding computer/communications and upstream) turned negative in July, falling 9.1% year-on-year versus 6.0% growth in June. Within this group, infrastructure and real estate chain sectors saw deepening declines: ferrous metal smelting, cement products, and furniture manufacturing losses widened to 114.8%, 50.4%, and 70.5% from June's 6.8%, 40.4%, and 28.2% respectively. In the consumer chain, automobile manufacturing profit declines deepened to 27.9% from 18.6% in June, though its drag on overall industrial profit growth eased slightly to 1.4 percentage points. Food and pharmaceutical manufacturing profits also turned negative at -6.0% and -0.2%, compared to 3.6% and 22.4% growth in June. High-end manufacturing industries with higher export exposure maintained relatively steady profit growth, though most sectors including general equipment, special equipment, transportation equipment, and electrical machinery saw marginal cooling in July compared to June.

Looking at other financial metrics, corporate profit margins edged down while inventory growth continued to climb, though cash flows remained on an improving trajectory. The seasonally adjusted profit margin dipped to 5.4% in July from 5.5% in June, mainly dragged by midstream and downstream industries. Meanwhile, seasonally adjusted inventory growth rose further to 10.8% from 9.4% in June, potentially reflecting passive inventory accumulation amid supply shocks. Industrial firms' cash and short-term investments grew 8.1% year-on-year, up marginally from 7.9% in May.

Looking ahead, domestic demand indicators including production, consumption, and property cycles remain weak, while the second closure of the Strait of Hormuz has also raised external demand uncertainties. The focus is on whether domestic fiscal policy can step up to support domestic demand and sustain the recovery in corporate earnings. The July Politburo meeting emphasized "strengthening counter-cyclical adjustment." Since August 22, the Central Financial and Economic Affairs Commission has published four articles elaborating on "how to view and manage China's economy," expressing overall satisfaction with H1 growth and highlighting achievements in structural transformation, such as "new growth drivers contributing over 40%" and "deploying innovation chains around industrial chains." The articles also signaled faster policy fund implementation, noting that "the average daily treasury balance in the first half of this year was relatively large, indicating ample fiscal resources available." The emphasis is on accelerating fiscal spending to quickly translate into tangible work output and leverage more private investment. The key question ahead is whether fiscal expenditure intensity can increase, including whether new policy-oriented financial instruments can be deployed and delivered more quickly.

Breaking down the analysis of corporate profit changes: Although overall industrial profit and revenue growth remained at relatively high levels in July, domestic demand has been under pressure since Q2. The PPI peaked in June and has since declined, corroborating the trend in corporate earnings. Structural divergence has become increasingly apparent. Overall, July industrial profits above designated size grew 11.2% year-on-year, down from 15.1% in June, while main business revenue growth slowed to 6.5% from 11.2%. Computers and upstream raw materials continued to be the main pillars of industrial profitability. Excluding upstream and computer/communications industries, industrial profit growth fell sharply to -9.1% from 6% in June — the first negative reading this year, underscoring sustained pressure on domestic demand growth.

First, upstream industry profit growth rebounded to 44.3% in July from 33.4% in June, with profit growth in upstream industries excluding the oil and gas chain accelerating month-on-month. Upstream revenue growth slowed to 9.1% year-on-year from 15.0% in June, while the seasonally adjusted profit margin improved to 20.0% from 19.2%. Coal mining and washing profits surged to 130.0% year-on-year from 83.2% in June, driven partly by a low base but also by a "price-for-volume" dynamic following supply shocks in the sector. Nonferrous metal mining profit growth rose to 47.8% from 24.8% in June, while declines in ferrous metal mining and cement mining narrowed to 15.5% and 39.1% respectively from 26.5% and 39.9% in June. On the other hand, likely affected by falling energy prices in July, oil and gas extraction profit growth slowed to 7.4% from 13.3% in June.

Second, AI demand continued to drive related industries to lead profit growth. Computer and communications manufacturing profits surged to 151.7% year-on-year in July from 80.1% in June, with its contribution to overall industrial profit growth rising to 13.5 percentage points from 10.2 percentage points. This aligns with the industrial value-added growth in the computer and communications sector accelerating to 19.1% and PPI growth rising to 4.4% in July. Notably, South Korea's semiconductor export growth in the first 20 days of August climbed to 198.8%, up from 180.7% for the full month of July, indicating the semiconductor cycle remains robust and likely to continue supporting profit growth in related industries.

However, other industries (excluding computers/communications and upstream) saw July profits turn negative at -9.1% year-on-year versus 6.0% growth in June, as the profitability spectrum of midstream and downstream industrial firms outside the AI chain narrowed amid overall domestic demand pressure. The chemical chain continued to see profit growth decline amid international oil price volatility, with petroleum processing and chemical products profits falling to -131.2% and -7.3% from -116% and 48% in June. Infrastructure and real estate chain profitability is yet to improve, with ferrous metal smelting and cement products profit declines widening to 114.8% and 50.4% from 6.8% and 40.4% in June. Furniture manufacturing profit declines widened to 70.5% from 28.2%, with revenue turning negative at -8.6% from 4.1% growth in June, possibly affected by demand front-loading from earlier subsidies. High-end manufacturing with higher export exposure maintained relatively steady profit growth, though most sectors cooled in July: general equipment, special equipment, transportation equipment, and electrical machinery manufacturing profits slowed to 0.9%, 7.2%, 6.7%, and -2.0% respectively from 7.9%, 15.1%, 45.4%, and 10.4% in June. Other consumer goods industries also saw profit growth decelerate, with automobile manufacturing profit declines widening to 27.9% from 18.6% in June, though its drag on overall industrial profit growth eased slightly to 1.4 percentage points. Food and pharmaceutical manufacturing profits turned negative at -6.0% and -0.2% versus 3.6% and 22.4% growth in June.

By ownership type, profit growth in state-controlled, share-holding, private, and foreign-funded enterprises all declined in July. State-controlled enterprises saw profit growth slow to 6.1% from 11.5% in June, share-holding enterprises to 17.4% from 27.2%, private enterprises to 0.3% from 23.3%, and foreign-funded enterprises to -7.6% from -2.8%. In relative terms, share-holding enterprises led cumulative profit growth in the first seven months of this year at 23.6%, while state-controlled, private, and foreign-funded enterprises posted cumulative growth of 16.3%, 10.9%, and 1.2% respectively, showing divergence between domestic and foreign-funded firms.

Regarding other financial metrics: corporate profit margins edged down, with the industrial profit margin falling to 5.4% in July from 6.3% in June, and the seasonally adjusted margin easing to 5.4% from 5.5%. A breakdown shows upstream profit margins improved while midstream and downstream margins declined, intensifying the divergence between upstream and mid-to-downstream sectors. Upstream profit margins rose to 20.6% from 19.9% in June, with coal, nonferrous, and cement mining margins up 0.5, 6.7, and 6.9 percentage points from 17.3%, 34.1%, and 3.1% in June, while oil/gas and ferrous mining margins fell 1.4 and 3.9 percentage points from 29.3% and 13.1%. Midstream margins declined to 4.1% from 4.8%, with petroleum processing, chemicals, and instrumentation manufacturing margins down 0.2, 1.3, and 1.5 percentage points. Downstream margins fell to 6.6% from 8.1%, with textile and apparel margins up 3.1 percentage points but pharmaceuticals, automobiles, and computers down 10.9, 2.9, and 0.6 percentage points respectively. Overall, midstream and downstream margins declined, reflecting continued drag from domestic demand.

Industrial firms continued their inventory buildup in July, with seasonally adjusted inventory growth rising to 10.8% from 9.4% in June. The seasonally adjusted leverage ratio edged up to 58.2% from 58.1%, while accounts receivable as a share of revenue rose to 19.4% from 18.5%. Corporate losses widened slightly in June, with cumulative losses in the first six months of 2026 increasing 5.7% year-on-year versus 3.1% in the January-May period, while cash flow growth accelerated further. Specifically, cash flow growth at industrial firms rose to 8.1% in June from 7.9% in May. Financial expense growth slowed to 21.1% in June from 22.3% in May, with financial expenses as a share of main business revenue continuing to decline. The seasonally adjusted current asset ratio in June was broadly flat at 51.8% compared to May. Data for July on financial expenses, current assets, and loss amounts have not yet been released.

Risks: 1) Declining property transaction volumes could weaken the momentum of domestic demand recovery; 2) Escalating US-Iran conflict could impact global aggregate demand.