(Bloomberg) -- China’s industrial companies saw their profits climb as higher prices for commodities eased pressure on miners, though questions remain over whether the gains can be sustained due to concern over excess capacity in some sectors.

Industrial profits at large companies rose 0.7% from a year earlier in May, the National Bureau of Statistics said on Thursday. That compared with a 4% growth the previous month.

The firms have been struggling to boost profits as a buildup in manufacturing capacity led to price cuts in sectors such as electric vehicles. Compounding the problem, companies and consumers are hesitant to spend because of a property downturn and lingering deflationary pressure. 

The benchmark CSI 300 Index fell as much as 0.8% on Thursday morning, and Chinese shares traded in Hong Kong lost 1.8%. The yuan was little changed at 7.2684 per dollar as of 10:10 a.m. local time.

Industrial firms’ slight earnings improvement in May was helped by higher commodity prices, which helps boost miners. The profit drop at mining companies slowed to 16.2% in January-May from the 18.6% retreat reported last month. The Bloomberg Commodity Spot Index, which tracks 23 raw materials, averaged 5.5% higher in May compared with a year earlier.

Foreign demand for Chinese goods was also solid, with exports jumping more than expected last month.

Whether the recovery can continue remains to be seen as domestic demand has stayed stubbornly weak. The housing slump deepened in May, which has demand implications for steel, iron ore, decoration materials and more. Retail sales picked up some steam but growth was still well below pre-pandemic rates.

The government has been encouraging businesses and households to upgrade the machinery and appliances they use in a bid to boost consumption.

The campaign has benefited sectors such as equipment manufacturing, which saw its profit surge 11.5% on-year in the first five months of 2024. That was the single biggest contributor to the overall industrial earnings gain of 3.4% in the period, NBS analyst Yu Weining said in a statement accompanying the data release.

Private companies booked a 7.6% earnings growth in the first five months, versus an increase of 12.6% at foreign firms and a 2.4% drop at enterprises controlled by the state, according to the NBS.

--With assistance from Jasmine Ng.

(Updates with more details and market moves.)

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