Profitable start for Chinese manufacturing fueled by policy tailwinds

Editor's note: Ma Xiaobai is a research fellow of the Development Research Center of China's State Council, and Zhu Jiayi is a PhD student of Tsinghua University. The article reflects the authors' opinion, and not necessarily the views of CGTN.

The latest data revealing a 7.9 percent year-on-year surge in profits of industrial enterprises above designated size in the manufacturing sector to 1.017 trillion yuan ($143 billion) in the first quarter of 2024 bears testimony to the robust performance of China's industrial economy.

The remarkable performance in industrial enterprise profits has stemmed from a virtuous confluence of demand and supply-side driving forces. On the demand front, the economic data showcased a broad resurgence in investment and consumption. Fixed asset investment surged by 9.3 percent year on year in Q1 2024 after excluding the real estate sector, signaling a reinvigorated appetite for industrial upgrading. High-tech sectors like aerospace, equipment manufacturing, and computer manufacturing saw double-digit growth. Consumer spending displayed similar buoyancy, with total retail sales up by 4.7 percent year on year, boosted by a 47.3 percent increase in tourist expenditure during the Spring Festival holiday, reflecting robust demand driving industrial activity catering to household consumption.

A series of targeted policy measures have adeptly incentivized both consumer spending and productive capital formation demand. In the context of over-5-trillion-yuan annual demand for equipment investment renewal in key sectors, large-scale initiatives facilitating equipment upgrades and replacement of old consumer goods have stimulated investment in industrial machinery while simultaneously stoking sales of new household products. This nudge in consumer expenditure has replenished revenue streams and order books for industrial firms catering to the consumer market. In parallel, the government's comprehensive push for the "Three Major Projects" centered on affordable housing, urban village renewal, and public infrastructure has injected a substantial construction stimulus that has unleashed significant demand across industrial supply chains. This construction-led investment boom has provided industrial players with a consistent source of orders and sales revenues that buoyed profitability.

On the supply side, concerted efforts by enterprises to bolster new quality productive forces through technological upgrades and operational modernization have borne fruit. Having commenced production in Beijing in March this year, Xiaomi Automobile Super Factory is typical of this trend. Taking the body shop in the factory as an example, it has achieved a comprehensive automation rate of 91 percent with over 400 robots and more than 400 high-precision cameras, facilitating efficient black-light production. Its focus on technological modernization is in line with the increasing emphasis on advancing new quality productive forces within policy contexts. The Central Economic Work Conference held at the end of 2023 highlighted the urgency of enhancing enterprises' new quality productive forces through initiatives like fostering breakthroughs in core technologies and integrating cutting-edge innovations across production processes.

Crucially, this supply-side reinvigoration was also backed by conducive policy support aimed at bringing down government-imposed transaction costs and enterprise operating costs. Complementing these targets are overarching efforts to optimize the business environment, with the central government issuing a series of policies to create a market-oriented, world-class business climate underpinned by a sound legal framework. Tax and fee reductions, along with measures to cut operating costs, have tangibly increased the profitability of businesses. Furthermore, streamlined administrative processes and improved regulation have fostered a more enabling environment for industrial activity.

The positive trend in profit data releases a series of optimistic signals, including strengthened corporate investment confidence, optimization of industry structure, robust vitality within the Chinese market, and the sustained improvement of the business environment. The outperformance of profit growth in private enterprises at 12.7 percent and foreign-invested firms at 31.2 percent – both exceeding the average – exemplifies the huge potential of the Chinese market and the fruitful reforms in creating an enabling business ecosystem.

Moreover, the profit figures reflect an ongoing industrial restructuring toward more productive and advanced economic pursuits. High-end manufacturing and high-tech industries have witnessed stellar profit growth, signaling a transition toward higher value-added activities backed by innovation and technology integration.

As for challenges facing the sustained growth of corporate profits, effectively nurturing small and medium-sized enterprises (SMEs) through preferential policies and enhanced access to funding channels remains a paramount endeavor to fully harness their potential as significant contributors to economic dynamism. Continuity and stability in policies aimed at bolstering SMEs are imperative for fostering their sustained growth and profitability. Measures like tax incentives, streamlined regulatory processes, and targeted financial support programs ought not only to be initiated but also maintained over time to ensure their continued impact.

The challenges also include how to build a modern industrial system and enhance enterprise innovation capabilities. As underscored at the National Industrial and Information Work Conference in December 2023, 12 key tasks have been outlined to comprehensively implement high-quality development in industrial chains. The Ministry of Science and Technology has also proposed five crucial tasks toward this goal, which includes strengthening overall science and technology coordination, cultivating new advantages in future industries, and improving the national innovation system. Under the guidance of these policies and principles, how to effectively marshal resources for technological breakthroughs, incentivize expenditure on research and development, foster a broad-based quality workforce, as well as fortify public-private research collaboration will be vital to industrialize cutting-edge innovations.