Could be worse? Next year's China factory convention might be a decidedly chillier affair. Photo: Screenshot from The Shining

China’s factory bosses are waking up to the realization that the shimmering light of surging profitability seen at the start of the year was just a mirage out on the desert highway, sucking them back into a recurring nightmare of rising costs and slowing demand.

Heady expectations that economic reforms would drive a turnaround in factory productivity have ceded to bets on prices. Piling insult on top of injury, financing costs are muscling their way back onto the dance floor to spoil the profits party, new data from China’s statistics bureau show.

For the 227 million workers employed by the industrial sector, the rest of the year is not shaping up to quite the same joy ride they experienced in the first quarter. Or put another way, as the Eagles’ rock classic goes, “They stab it with their steely knives, but they just can’t kill the beast.”

Industrial profits in April rose 14% from a year earlier, stuttering after gains north of 20% and 30% in the previous two months. Earnings of all industrial enterprises totaled 573.7 billion yuan (US$83.6 billion) last month, down from March’s 688.6 billion yuan.

While it’s true that a handful of promising high-tech and consumer products sectors continued to churn out superior earnings, they cannot counter the massive headwind of falling prices across China’s vast factory floor seen in the producer price index earlier this month. PPI sank to 6.4% in April after hitting a recent high of 7.8% in February.

Where PPI led, factory profit data has now followed. In short, failure to maintain upward price momentum means factories won’t be able to ride the tailwinds of higher top-line growth as they did in much of 2016.

Last month, the industrial sector only managed to generate 71.7 billion yuan more profit than in April 2017, compared with 127.2 billion in March and 235 billion in the first two months of 2017 combined.

Surprisingly, the National Bureau of Statistics estimates that price factors accounted for 73% of April’s profit gain. Delving through previous releases reveals that the so-called “price factor” actually accounted for 88% of March’s profit gain and an astonishing 98% during the January-February period.

No wonder then that state-owned industrial players, with their heavy exposure to commodities and other upstream materials, have clawed back a bigger slice of the profit-pie in recent months, albeit after years watching private-sector upstarts gobble up an ever-increasing share of the spoils.

Without a genuine shift away from prices and towards productivity, it seems as if China’s factory bosses really are doomed to wander the corridors of Hotel California forever, believing they can check out any time they like, but never really being allowed to leave.