The Q1 industrial profits data published this week were very strong. Net profits continued rise rapidly and are now 50% higher than they were two years ago. Only a third of this is due to higher sales. Instead, the bulk of the increase has come from fatter net margins, which hit a record high last quarter. The picture isn’t quite as bright when looking at gross margins, however, which have begun to drop back due to a jump in input costs. (See Chart 1.) So far, the impact on net profits has been more than made up for by savings elsewhere, including lower taxes and administrative expenses. But this offset is likely to be temporary, with the drag on profits from higher input prices becoming more visible before long. Officials are already concerned, with Premier Li this month calling for stricter regulation of raw material prices.
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