China’s companies are getting more for their goods, but margins remain a challenge

Factory-gate prices in #China rose for a third consecutive month in May, a supportive trend for the nation’s companies. Will this result in improved profitability, as long-term correlations suggest?

So far, the PPI rebound has not produced a full margin recovery and remains concentrated in certain sectors. Excess capacity, limited pricing power and higher expenses are constraining the pass-through from revenue to profits.

Resource-linked sectors (especially non-ferrous metals, coal, petroleum and chemicals) are best-positioned. Producer prices and profitability are both rising. But there is a large swath of industries where the opposite is the case. These include previous export engines such as furniture and apparel, sectors linked to property development (such as steel and aggregates), and the automotive industry.