China's industrial profit growth slowed to 21.1% year-on-year in May, down from 24.7% in April, marking the first moderation since November 2025, according to Commerzbank analysts Charlie Lay and Dr. Henry Hao [1]. The cumulative profit growth for January–May reached 18.8%, slightly higher than the 18.2% recorded for January–April [1]. Despite the solid headline figures, the analysts note that the slowdown indicates easing momentum, with strong exports and higher producer prices no longer fully offsetting weak domestic consumption and investment [1].
Looking ahead, the official manufacturing and non-manufacturing PMI readings for June are expected on Tuesday. Bloomberg consensus forecasts both PMIs to remain just above contraction, at 50.1 for manufacturing and 50.0 for non-manufacturing, but Commerzbank expects both to slip into contraction territory [1]. The analysts highlight that slower profit growth, weak consumption, and falling investment are increasing pressure on policymakers to support economic activity [1].
In terms of monetary policy, expectations for further rate cuts have diminished, with just over half of Bloomberg-surveyed economists now anticipating the People's Bank of China (PBoC) will keep rates unchanged through the end of 2026 [1]. However, Commerzbank still sees scope for a 10 basis point cut in the second half of the year [1]. On the policy front, Vice Premier He Lifeng emphasized the need for faster breakthroughs in core technologies and greater technological self-reliance during a visit to Sichuan province, reinforcing Beijing's focus on advanced manufacturing as a structural growth driver amid subdued domestic consumption [1].
In the foreign exchange market, the USD/CNY exchange rate rose 30 pips to 6.80 last Friday and increased by 320 pips over the week, while the offshore USD/CNH rate also rose 30 pips to 6.80 last Friday and gained 210 pips for the week, reflecting pressure on the Chinese yuan [1].
CONCLUSION
The slowdown in China's industrial profit growth and persistent weakness in domestic consumption and investment have weighed on the Chinese yuan, prompting market expectations of further policy support. While rate-cut expectations have faded, Commerzbank still anticipates a potential 10bp cut in H2. The FX market has responded with a notable weakening of the yuan against the US dollar.