Chinese companies are earning much lower margins than global competitors

China has become the world’s manufacturing powerhouse, but its companies are making far less money than their global rivals. Chinese listed companies reported an average profit margin of just 4.88 per cent in the first half of 2026, against 8.87 per cent for companies elsewhere, exposing the growing gap between production strength and profitability.

The findings come from a Reuters analysis of LSEG data covering 5,209 Chinese companies and 9,733 companies in other markets, each with a market value of at least $100 million.

Weak domestic consumption, intense price competition and a stronger yuan are squeezing Chinese businesses. The pressure comes even as the country’s exports remain resilient and economic growth has picked up, highlighting the difficulty of converting higher production and sales into sustainable profits.

Weak domestic demand puts pressure on businesses

China’s sluggish domestic consumption is one of the biggest reasons behind the profitability gap.

The country’s economy grew 4.5 per cent in the third quarter of 2026, accelerating from a three-year low, largely on the back of strong exports. But retail sales, an important indicator of household consumption, increased only marginally.

The prolonged downturn in the property sector has further weakened consumer confidence and eroded household wealth. With consumers cautious about spending, businesses have limited room to increase prices and improve their margins.

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The pressure is also visible in factory prices. China’s factory-gate prices rose 5 per cent year on year in September, while industrial input prices increased 6.9 per cent. Prices of consumer goods at the factory gate declined 0.1 per cent.

The divergence points to a difficult environment for manufacturers. Rising input costs are squeezing businesses even as weak demand limits their ability to pass those increases on to customers.

Chinese companies in healthcare technology, tobacco, software, real estate management and development, and IT services recorded negative profit margins in the first half of the year.

Their global counterparts, meanwhile, reported median profit margins of 11.5 per cent in healthcare technology, 21 per cent in tobacco, 10.8 per cent in software, 17.7 per cent in real estate management and development, and 6.8 per cent in IT services.

Stronger yuan creates another challenge for exporters

Chinese exporters are facing additional pressure from the appreciation of the yuan.

The currency has strengthened by around 10.2 per cent against the US dollar since April 2025. A stronger yuan makes Chinese products more expensive for overseas buyers when converted into foreign currencies, potentially reducing their price competitiveness.

Exporters can raise prices to compensate for the currency movement, but that risks losing orders to competitors. Alternatively, they can absorb the difference, further squeezing already thin margins.

The currency’s appreciation also presents a dilemma for Beijing. A stronger yuan could address international concerns about China’s exchange-rate policy and improve the purchasing power of Chinese households. But further appreciation could hurt exporters, threaten employment and weaken one of the economy’s important growth drivers.

The pressure is not limited to traditional, labour-intensive industries. Even manufacturers in sectors considered central to China’s next phase of industrial growth are struggling to generate higher returns.

Electric vehicles and technology hardware face thin margins

The profitability challenge is particularly notable in industries that Beijing has identified as important to its industrial and technological ambitions.

Chinese automobile companies recorded profit margins of just 2.5 per cent in the first half of 2026. Technology hardware, storage and peripherals businesses posted margins of 3.5 per cent.

The electric vehicle industry is a prominent example. Chinese manufacturers have competed aggressively on prices while expanding production and pursuing overseas customers. This has helped them gain market share, but has also intensified competition and limited their ability to raise prices.

Excess production capacity and competition among domestic manufacturers have added to the pressure. Companies are increasingly looking overseas for customers, but the stronger yuan and competition in international markets make it harder to improve profitability.

There are some exceptions. Transportation infrastructure was China’s strongest-performing sector, with a profit margin of 20.97 per cent, compared with 16.5 per cent among global competitors.

Marine transport, beverages and utilities also performed relatively well, recording margins of between 13 per cent and 14 per cent.

Other strategically important sectors, including pharmaceuticals, life sciences tools and services, and semiconductors and semiconductor equipment, posted margins of 10 per cent, 8.1 per cent and 7 per cent, respectively. With the exception of life sciences tools and services, these sectors continued to trail their global counterparts.

Why China’s profitability problem matters

The findings highlight a structural challenge for the world’s second-largest economy. China’s manufacturing capabilities and export competitiveness have expanded, but this has not translated into comparable improvements in corporate profitability.

The distinction matters because higher production and market share do not necessarily mean businesses are generating sustainable returns.

Companies operating on thin margins have less room to absorb higher input costs, invest in research and development, increase wages or withstand disruptions in global trade.

It could also constrain China’s industrial ambitions. Businesses need sustainable earnings to finance investments in advanced manufacturing, semiconductors, automation and other strategic technologies without becoming excessively dependent on borrowing or government support.

(With inputs from agencies.)