Start-of-year industrial enterprise profits: higher-than-expected quality

Under the spotlight of data, what is the true “base color” of corporate profits? From 5.3% in December 2025 to 15.2%, the surge in the profit growth rate of industrial enterprises in January-February has added a few surprises to the start of the year’s economy. However, it is worth delving deeper, as the early-year data inevitably suffers from short-term disturbances such as sample rotation and the timing of the Spring Festival, casting doubt on the “gold content” of this industrial profit report—whether this high growth is a transient fluctuation or a substantial improvement in corporate profit fundamentals. Peeling back the data fog, we can still capture some thought-provoking signals:

Sample adjustments may provide incremental support for profit growth. According to statistical regulations, the National Bureau of Statistics regularly adjusts the survey scope of large-scale industrial enterprises each year; some enterprises are newly included due to meeting scale standards, while others exit due to reduced scale. In recent years, although the growth rate of the number of large-scale enterprises has slowed, it also reflects the continuous improvement in enterprise quality. With the addition of high-quality enterprises, it may have “fueled the fire” for the profit growth rate at the beginning of the year.

Of course, the timing of the Spring Festival is also a significant technical factor driving high profit growth at the start of the year. Considering that this year’s Spring Festival is significantly later than in 2025, the disturbances to business operations in January-February are smaller, and the extended effective working time naturally leads to more profits being “gathered,” objectively pushing up the profit growth rate readings.

From the perspective of a three-factor framework, the high profit growth of industrial enterprises at the beginning of the year stems from the resonance of “increased volume and improved profit margins.” Driven by the “early start” in the first year of the 14th Five-Year Plan, industrial production has noticeably accelerated at the start of the year, providing strong support for profits through industrial added value. Although prices remain a drag, the extent to which PPI (Producer Price Index) has negatively impacted profits is continuously narrowing, driven by the ongoing effectiveness of “anti-involution” policies and the influence of external factors on the prices of certain industrial products.

More noteworthy is the significant improvement in corporate revenue profit margins. Considering the proportion of costs and expenses to revenue, this ratio has noticeably decreased at the start of the year, possibly due to factors such as cost reduction and efficiency improvement driven by equipment updates and the continuation of tax cuts and fee reductions.

From different industries, profit recovery shows clear industry differentiation: upstream relies on “price,” midstream on “volume,” while downstream is currently under pressure. In January-February, the year-on-year cumulative profits for upstream, midstream, and downstream industries were 34.3%, 26.4%, and -11.4%, respectively, with upstream and midstream performing significantly better than downstream. Specifically:

Upstream profit improvement is more supported by price factors. By comparing the marginal changes in industrial added value and PPI growth rates across different industries, we find that at the beginning of the year, more improvement occurred in the PPI of upstream industries. Driven by both “anti-involution” policies and external factors, the profits of non-ferrous metal smelting and mining achieved nearly triple-digit growth from January to February.

Midstream profit growth reflects the trend of accelerated production. In addition to the rapid development of new productive forces, the “shine” of exports at the beginning of the year has also played a significant role; for instance, the profit of the electronic equipment manufacturing industry increased by 203.5% year-on-year, with industries such as general equipment, specialized equipment, electrical machinery, and transportation equipment maintaining positive profit growth rates.

In contrast, downstream industries have temporarily “fallen behind.” Although this year’s Spring Festival “boom” effectively boosted food manufacturing profits significantly into positive territory and narrowed the profit decline in the beverage industry, profits in major consumer-related sectors such as furniture manufacturing (-40.0%) and automobile manufacturing (-30.2%) still saw a significant decline, reflecting residents’ cautious attitudes towards durable goods and large expenditures.

Profit improvement and proactive inventory replenishment are emerging, but sustainability still depends on demand. Driven by the improvement in corporate profits, the growth rate of finished goods inventory accelerated in January-February, showing early signs of proactive inventory replenishment. However, whether this trend can continue ultimately depends on the pace of recovery in terminal demand—current downstream profits reflect that terminal demand has not fully stabilized, and the sustainability of replenishment remains to be observed.

Source: Chuan Reading Global Macroeconomics

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